CBA, Revenue and Debt

I wanted to start here by talking about how slow the offseason is and how nothing really

happens.  I think we all know the truth is that there really is no offseason anymore and that there’s always news and always something happening even if we, the public, aren’t privy to it.

There is one troubling problem in the NFL today that could have a major impact on the game that we all know and love.  This problem could have long-lasting effects – revenues, debt and the CBA.

Just because there’s little being said about the collective bargaining agreement or arguments between the NFL ownership and the NFL Players Association doesn’t mean that there isn’t something going on behind closed doors.

I wanted to dive into some of the issues that the league, the teams and the players are facing and how they could impact the game.

Debt

Recently, the NFL was outted by the media when a court filing was made public about the debt the league is facing.  The numbers are staggering – $9 billion in debt.  Count the zeroes – $9,000,000,000.  That’s a huge number!

Much of that debt comes from stadium building projects.  As an example, the Indianapolis Colts have contributed $52 million toward their new stadium, Lucas Oil Stadium.  That’s money that will come directly out of the Irsay’s pockets.

These stadiums are actually digging the hole deeper in other ways.  A small-market team, like the Colts, can build a new stadium, charge more money at the gate, gain a tremendous amount of money from luxury suites and rake in an even larger amount of cash in advertising revenues.

However, the Collective Bargaining Agreement calls for a salary cap that is based on an average of these revenues among all teams.  Large market teams like the Washington Redskins can bring in as much as $312 million per annum (based on 2006 financials) while a team like the Colts would bring in $184 million.  That’s a steep drop between the two.

Even more troubling are the teams at the bottom of the revenue stream like the Minnesota Vikings which brought in only $182 million.

The average among the teams in 2006 came to $204.3 million which could drive the salary cap to a level that is far too uncomfortable for the small-market teams.

Despite revenue and revenue sharing, teams are facing these large sums of debt while also pinched by a salary cap that can work against them.  Keep in mind that teams not only have a limit on salaries paid to players (ceiling) but also have a minimum on player salaries (floor).  They must meet at least the minimum of the salary cap while still paying down debts.

The Markets

The NFL has been the big cash cow in major sports.  Their TV revenues are second to none.  Billions pour into the league coffers from TV networks as they line up to broadcast games.

At play here also is market size.  Not all NFL teams are located in large television markets which means smaller populations and, as a result, fewer viewers for those teams.

The league is still fighting the ever-publicized battle over Los Angeles and its lack of a franchise.  It is the second largest television market in the country, after all.  The league would like to have a team located there – again.  But adding another large market team couel drive up the average and further impact small market teams.

Small market teams are at odds over the debt and the salary cap with teams in larger markets.  The Colts are one example but cities like Jacksonville (27th market in the NFL and 49th in the country) feel the pinch as they aren’t set to draw large sums of money from their stadiums or from local viewers.  This can also mean a smaller fan base which equals fewer merchandise sales and even less revenues for the team.

Our Carolina Panthers, by the way, rank 21st in the league and 25th in the country.

The Panthers’ latest available financials can be viewed here.

The Union and Collusion

The NFLPA has already filed a case in February of this year charging the league of collusion.  This was the first collusion case ever against the NFL owners for their recent agreement to reduce by 20% the debt limitations that apply to individual NFL Clubs.

As the complaint states, Tom Benson, owner of the New Orleans Saints, who also serves as the Chairman of the NFL Finance Committee, publicly stated that “the union forced” the new debt limits, obviously referring to the cost of player salaries and benefits provided for under the CBA.

Recent statements on the NFLPA’s website from Gene Upshaw, the union’s president, spell out the players’ stance.

"Gene Upshaw on the Owners Opting out of the CBA (Dated April 21st)It is obvious to us that the NFL owners will exercise their right to terminate the Collective Bargaining Agreement early. As players, we have to remember the agreement does not end just because the owners decide to opt out. We will have two seasons (2009 and 2010) before the CBA ends. The early opt out only begins the discussion on terminating or extending the agreement. Our task today is to make sure every player understands what lies ahead and what our options are. These are the most important issues facing us right now. We have to get back on message."

One part of this fight is the money due each season to rookies.

NFL teams are now paying large sums of money to untested players immediately after they are drafted.  Far too often, players taken in the early parts of the draft are making more money to play in their first season than a large majority of veterans already playing the position.

Teams want to reduce the amount of money guaranteed to these players to reduce the strain on the salary cap and on their debt levels.  The NFLPA is opposed.

"Gene Upshaw on a Rookie Salary Cap (Dated April 28th)Every spring, the buzz from general managers is, ‘We need to fix rookie compensation.’ We addressed this issue by limiting rookie pool growth and fixing the maximum number of years a rookie could sign. The length of contracts severely limits players’ ability to move money into future years. What the media doesn’t report is that the rookie pool is part of the overall salary cap, and a player is only a rookie for one season. Clubs want the players to pay for mistakes teams make in drafting. We’ll never agree to a rookie wage scale in such a short-career sport."

It’s a short career that most NFL players face.  However, take what the Miami Dolphins did this year in the draft.  They sought to limit the amount of guarantees in the contract to their first-round pick, Jake Long.  This limited them in some ways in negotiations.

Had the team determined to take a skill position player like a quarterback, the money owed to that player in his contract would have, in all likelihood, been astronomically greater than going after a lineman.

It will be interesting to watch the contract negotiations between teams and their first-round picks this year.  If things heat up, there could be yet another claim from the union of collusion.

Working Without a Cap

Fans normally envision the NFL without a salary cap meaning that their team can “buy a championship” one year then sell off the parts one year later.  But that’s not necessarily how it will work.

It’s true that large market teams can benefit from having no spending limits.  However, these teams also know that guarantees will be tied to many contracts which will impact their revenues for years to come.  This may hold them back from spending.

Also, small market teams will not fight the lack of spending limits on player contracts since the minimums will no longer exist.  It’s the minimums that often drive much of their revenues out the door.

The union on the other hand wants to keep the cap in place.  It sounds a little convoluted but that’s the case.  They know that if the teams are working without a cap, they will have no minimums to meet and therefore some teams can opt to avoid large contracts.  This will drive down player salaries in enough markets that the averages across the board will take a significant hit.

A salary cap may no longer exist after the 2009 or 2010 season.  Gene Upshaw had a few words about this on the NFLPA’s site as well.

"Gene Upshaw on Having No Salary Cap (Dated April 7th)At the NFL Owners meetings last week, several owners expressed a desire for a future without a salary cap. This is one concept we as players can live with. The first year of our CBA didn’t include a salary cap. We agreed it would only occur if owners triggered the cap by their spending–which they did in 1993 (when spending topped 68 percent of Designated Gross Revenue). The cap began in 1994. We’ll have to wait until 2010 to test owners’ discipline on spending, but it will be a welcome time. Once the cap is gone, it’s gone forever."

I’m not so sure I buy this.  When average salaries drop, the union will again cry foul.  Collusion charges won’t be far behind.  Sure, large market teams can begin paying huge chunks of money on top-notch free agents but when the bottom third of the teams decide to stay out of the market for these players, the contract dollars won’t be there.  Averages will drop.

It’s these averages that now control the money due to players who receive the franchise tag from clubs who want to retain a potential free agent.  I can’t imagine a large drop in these numbers making the union very happy – unless they feel that the average will not be negatively impacted since the top third of the teams will pay that much more without a cap in place.

The Bottom Line

This fight is just beginning to heat up.  With the complaint of collusion already filed the union has made an early statement.  The teams can, however, opt out of the CBA at anytime due to language written into it.  Should they opt out early, that could leave both sides in a stare down.

Obviously, certain issues (rookie salary cap, the overall salary cap numbers, debt, revenues, etc.) will get in the way.  The owners can opt out but the CBA remains in place until the end of 2010.  The negotiations will be on-going throughout that time.

Whether an agreement can be reach within that window will determine if the league will see an end to the longest period of labor peace in professional sports.  It will also determine if the fans will see an end to uninterrupted play.

This is a fight that bears watching.  It will determine if we get to watch football or picket lines.