Revenue Sharing and The Salary Cap

[CLEVELandMILIDH]

I thought this was very interesting

 

In the NFL there is revenue sharing and a salary cap. What does this mean?

 

Revenue sharing

 

About 2/3 of the NFL's money comes from the TV deal. The players get about 2/3 of team revenue. So, more or less, the TV contract goes to pay the players. These contracts are typically for about 5 years, and every time they are renegotiated the price goes up. So do player's salaries.

 

The money from the TV contract is share and share alike - the Redskins, Cowboys, Bills, and Packers get identical checks. This money is key to the success of the smaller franchises. Without the TV contract money, there is simply no way on earth that Green Bay could ever field a competitive team.

 

There are a lot of other sources for NFL money. NFL licensed jerseys, for example that Randy Moss jersey you put on your kid last Halloween when you dressed him up as a demon, result in license fees going to the NFL. This money is also equally shared.

 

When the teams play, there is a "gate," the money people pay for seats. This is in the neighborhood of about $2.5M per game. This money is split 60-40, with the visiting team getting 40% of the gate. Because of this teams like Jacksonville and Arizona just love it when the Packers or Cowboys come to play. These are the two or three games each year these teams can count on selling out, and the money they get is very welcome. Sometimes you will find that to buy a ticket to see the Packers on the road you have to buy a package of two or three tickets. This is nothing more or less than a device to get money from Packers fans into the pockets of the other teams owners.

 

Unshared money

 

The newer stadiums have large box seats which are leased to corporations. This money is not currently shared, which gives individual teams a big incentive to get a new stadium with fewer normal seats and more corporate seats.

 

Some teams (read: Cowboys) are starting to make their own licensed products and refuse to share the money. They theory is that Jerry Jones is a brilliant marketer (who just happens to live next to half the country's oil wells) so why should he share his hard-earned money with a slacker like Art Rooney (who just happens to live next to a bunch of shut-down steel mills in a solidly blue-collar town). The box seat and license money is a subject of great debate at this instant, and is the big holdup in renewing the NFL labor contract: the owners cannot sign a labor contract until they know how much money they're taking in, and until the new revenue agreement is signed they don't know that.

 

Finally, a well designed stadium can bring in other money for events like concerts, weddings, a pro shop, and the sale of $12 hot dogs. This money is not shared, again giving teams a huge incentive for a new stadium. The Packer's stadium is a model of efficiency, and does a league-leading job of extracting money from the local residents. If Green Bay were in the Spy / Defense / Government business like Washington, or the oil business like Dallas, the Packers would almost certainly lead the league in revenue. In fact Green Bay makes placemats, napkins and toilet paper, so the Packers are about #12 in the league in revenue.

 

In 2005 teams will make about $110M - $140M per year in gross revenue, and the players get about $85M of that. The $85M number is the salary cap. This is an agreed upon percentage of total league revenue divided by 32. Each team may spend $85M on players, no more. Each team must spend at least 80% of the salary cap, it's not allowed to be a complete cheapskate. However, things are much more complicated than that simple statement. First, the TV contract has escalator clauses. This has nothing to do with shopping malls and elevators, it means the contract payments increase each year. In '06 the salary cap is likely to be over $100M, about a 20% increase. This means that the top contracts are continually going up in value, and a contract signed a couple years ago is suddenly looking pretty thin. Although the US as a whole has almost no inflation, the NFL lives in an artificial world with about a 10% inflation rate. The idea of salary indexing has not really happened in the NFL, with the result that you see people sign very competitive contracts and two or three years later comparable players are making twice as much. This promotes a lot of hard feelings and contract problems. Appendix 1 shows the historic salary cap.

 

All 53 team players and the 8 players on the practice squad count towards the salary cap. A team may not exceed the salary cap. If a team does exceed the cap, the NFL can waive players from the team, starting with those earning the lowest salaries, until the team's payroll has fallen under the cap. In addition, the NFL may fine a team up to $1 million per day for exceeding the cap. In practice this doesn't come up because if a proposed contract would put the team over the salary cap, the NFL won't approve the contract.

 

Player benefits are currently capped at $12,156,000 per club above the salary cap.

 

The NFL Labor Contract

 

The NFL players have a union, the NFL Players Association, the NFLPA. These guys negotiate a labor contract every five to seven years. The contract specifies the percentage of total NFL revenue that goes to the players (currently roughly 2/3), and also specifies certain minimum salaries for players. There is a minimum salary you can pay a guy who is in his first year, which is just over $200k. For each year the player has in the NFL, the minimum salary goes up, until a 10 year veteran has a minimum salary of just over $750k. These numbers change each year with the salary cap, so it's a bit of work to keep up on the exact number each guy has for his minimum salary. Minimum salaries shown in appendix 2.

 

The NFLPA was worried about veterans being cut for cheaper young guys, so if a player is signed to a one year contract, paid the minimum salary and given a signing bonus no larger than $25,000, then he only counts $450,000 against your cap. Better yet, the money he is paid above the $450,000 amount comes out of a league- wide "player benefit pool" and not from your team's checkbook. Other player benefits include the league retirement plan. Player benefits amount to another approximately $13M over the $85.5M cap in 2005.

 

The labor contract also specifies what sorts of contracts you may sign with a player. When you read that a player has signed his contract, it's not actually a done deal. The contract is then forwarded to the NFL and NFLPA legal offices, where it is reviewed and either accepted as legal or rejected. Each year a few contracts are sent back for a re-work because the NFL or NFLPA lawyers say it's not a legal contract under the labor agreement.

 

Some (most) teams perceive themselves to be very close to a superbowl, and therefore the idea of somehow stealing a bit of next year's salary cap for use this year can be very compelling. Especially because of the salary cap inflation, which means the money you steal from next year is a bigger fraction of this year's cap than of next year's, and in any case next year you can do it again. How do you steal cap room from the future? Easy, it's all laid out in the labor agreement.

[CLEVELandMILIDH]

Some more

 

Each year after the NFL draft. The NFL considers the number of picks you made and the rounds they were made in, and gives you a rookie salary cap. This rookie cap is typically something like about $3M - $6M. This is a portion of your overall salary cap, it's not extra money. The contracts you sign with your draftees must fit not only in your overall salary cap, but also inside this rookie cap. For this reason your 1st round draft pick is typically the last to sign. You need to sign everyone else first so that you know how much cap space you have available for the 1st round pick. If you've used up most of your rookie cap on the other players, you're going to have to sign a contract with a bunch of roster bonuses and such to make up the money you need and still fit in this year's camp.