How is the Salary Cap Determined?

1. What is the goal of the NFL Salary Cap and how is it calculated in a nutshell?

The Collective Bargaining Agreement (CBA) seeks to ensure that the player salaries and benefits (Player Costs) are approximately 47% of revenues generated by the NFL for the duration of the CBA. Player Costs are calculated as a percentage of projected revenues for the League Year in which it will be effective. Player benefits (health insurance, pension benefits etc.) are subtracted from Player Costs and the remaining pot is divided by the number of teams in the NFL (currently there are 32 teams). The resulting figure is the NFL salary cap. There are many nuances to the calculation which we will be covering in the following questions.

2. What revenues are included in the projected revenues?

The CBA between the NFL and NFL Players Association (NFLPA) delineates that as a rule all revenues (AR) generated by the performance of players in NFL games are considered revenue for salary cap calculation purposes. This includes revenue generated at the team level and the League level. Gate receipts, PSL sales, concessions, parking, merchandise, team website and local TV, radio and sponsorship deals are the primary revenues generated on the team level.

At a league level, the NFL generates revenues from contracts related to TV and radio broadcasting rights, licensing, sponsorship, internet and mobile rights, special events (Super Bowl, draft etc.) and the NFL Network.

There are revenues which are excluded from AR based on the CBA such as the proceeds received by owners when selling their NFL franchise, fines, certain governmental expense reimbursements and revenues derived from real estate development opportunities in conjunction with stadium leases. Also as it is widely known, revenues from wholesale merchandise sold by the Dallas Cowboys and revenues from specific stadium PSL sales and naming rights are excluded as well.

3. What is the New Line of Business (NLOB) Deduction?

There are no reductions to AR. However, revenues generated by a “New Line of Business” (NLOB) can be offset with their related direct costs (DC). For the 2012 season the NLOB deduction was capped at three projects. Every subsequent year, another three projects may be added to this deduction (so that for 2013 there can be six projects receiving deductions – three for 2012 and three for 2013; and in 2014 the league could have up to nine projects receiving NLOB treatment).

For eligible projects, during their first three years, the deduction will be 50% of their DC for that league year. For years four and five, the deduction will be 25% of the DC for that league year. After five years, the NLOB deduction for that project expires. The deductions allowed are netted against related revenues. However, the netting of expenses cannot result in a negative number (e.g., if 50% of the direct costs for a project exceed its revenues, the AR count for such project shall be zero).

If the NFL adds additional International Series regular season games (beyond one game each league year), each additional game shall constitute a NLOB. Payments made by the NFL to the Clubs participating in the International Series for lost revenue (which is most relevant to the team losing a home game) are not considered when calculating direct costs.

The revenue related to the NLOB is be placed in the 45% bucket. After five years, when the NLOB expires, the project is accounted for in the NFL Ventures AR Bucket (see below).

4. What are the AR Buckets?

AR is divided into 4 different categories.

1) League Media- this category includes all the revenues national and international TV and radio contracts with NBC, CBS, FOX, ESPN, DIRECT TV, Westwood One and Sirius/XM Radio. NFL Network revenues are not included in this category.

2) NFL Ventures/Postseason – This category includes all other league generated revenues such as licensing, sponsorship, nfl.com, NFL Mobile, NFL Network. Additionally, any revenue generated from postseason games by the NFL or NFL teams.

3) Local – All revenues generated at the team level (with the exception of revenue generated from postseason games which is part of category #2.)

4) New Lines of Business – as described above

The three buckets of projected AR amounts are used to set what is called the “Player Cost Amount”. The Player Cost amount is the sum of: (1) 55% of projected League Media AR bucket; (2) 45% of projected NFL Ventures/Postseason AR bucket (except for New Lines of Business); (3) 40% of projected Local AR bucket ; and (4), 50% of the net AR for new line of business projects; less (5) 47.5% of the Joint Contribution Amount (JCA). JCA is a contribution that the NFL makes every year beginning with its $55 M contribution in 2012. These funds are used for player benefits (40%), medical research (20%) and charity (40%). The JCA allocation grows by 5% every year.

5. What is the Player Cost Amount?

It is the total cost for the owners (and compensation to the players) which is planned for an upcoming season based on projected AR. This includes both salaries, which are capped via the salary cap, and player benefits, which do not hit an individual team’s salary cap  but rather are calculated at the league level.

6. What are the Player Cost Amount Bands?

The Player Cost amount is generated via the AR Buckets calculation, but there are mechanisms in place to keep it within a certain range. These are the Player Cost Amount Bands that are used after calculating the Player Cost Amount via the AR Buckets and also after the application of the Stadium Credit.

Player Cost Amount Bands – For the 2012–14 League Years, if the Player Cost Amount before application of the Stadium Credit is greater than 48% of Projected AR then the Player Cost Amount is reduced to 48% of Projected AR. If, in any of the 2015–20 League Years, the Player Cost Amount before application of the Stadium Credit is greater than 48.5% of Projected AR then the Player Cost Amount is reduced to 48.5% of Projected AR. If, in any of these League Years, the Player Cost Amount is less than 47% of Projected AR, the Player Cost Amount is increased to 47% of Projected AR.

Application of Stadium Credit The Player Cost Amount is reduced by the Stadium Credit. However, even after the application of the Stadium Credit, the Player Cost Amount must be at least: 47% of Projected AR for the 2012–14 League Years; 46.5% of Projected AR for the 2015–16 League Years; and 46% of Projected AR for the 2017–20 League Years.

Bottom Line:  Depending on the league year, the range of player costs will be between 47%-48.5% of projected AR and after the application of the Stadium Credit, the player cost amount will be between 46%-47% of Projected AR.

7. How does the Player Cost Amount lead to the League-Wide Salary Cap?

The Salary Cap for a League Year is the Player Cost Amount (after the application of the  Stadium credit) less Projected Benefits (pension, insurance, payroll taxes, room and board, medical costs, per diems, and miscellaneous salary payments and other benefits), divided by the number of Clubs in the NFL in that League Year.

8. What is the Guaranteed Player Cost Percentage?

A:

Exhibit A -Illustration of Guaranteed Player Cost Percentage, Adjustments and Recaptures

Screenshot_1

Summary: Player costs are guaranteed to be 47% of AR on a cumulative basis for the term of the CBA. However if upward adjustments are made to get the cumulative percentage to 47% at any time during the life of the CBA, then the player cost percentage will capped at 47% (reduced via recaptures as necessary) for the length of the deal.

 

A) Every year, the League Year’s Player Cost Amount is expressed as a percentage of AR. This percentage is calculated for every league year and the cumulative average of all league years covered by the CBA (i.e 2011 and on) is calculated at the end of every league year. The Cumulative Average must be at least 47% (the “Guaranteed Player Cost Percentage”). In the event that, at the end of a given League Year (for example – 2018 in Exhibit A above), the Cumulative Average is less than 47%, an “Adjustment” is made to provide additional Room under the next Salary Cap (2019) equivalent to the amount that would have had to been added to the Player Cost Amount in the previous League Year (2018) for the Cumulative Average to have been equal the Guaranteed Cost Percentage. The Player Cost Amount for 2018 is deemed to be increased by the Adjustment for purposes of the Guaranteed Player Cost Percentage calculation for subsequent League

 

B) In an Adjustment is ever made pursuant to section A, and at the conclusion of any subsequent League Year the Cumulative Average is greater than the Guaranteed Player Cost Percentage, there must be a “Recapture.” The “Recapture” is a reduction in Room under the next Salary Cap (2021 in Exhibit A) to be set in an aggregate amount equal to the amount that would have had to be subtracted from the Player Cost Amount for such subsequent League Year (2020) so that the Cumulative Average would equal the Guaranteed Cost Percentage at the end of that year (2020). The Recapture may not exceed the dollar amount of any prior Adjustments that have not previously been offset by a Recapture. (For example, if prior Adjustments resulted in $10 million of additional Room, a Recapture could not exceed $10 million in Salary Cap space). The Player Cost Amount for such League Year (2020) is deemed to be decreased by the Recapture for purposes of the Guaranteed Player Cost Percentage calculation for subsequent League Years.

9. What goes into the Stadium Credit?

The Stadium Credit is comprised of three pieces:

  1. For a stadium construction project that began during the term of the current CBA (from August 2011-present) a credit of 50% (75% in California) of the private (team/League) cost of a new stadium is recognized over 15 years, beginning in the League Year before the new stadium opens. The credits for all stadium projects are totaled up to obtain this portion of the stadium credit.
  2. 70% of revenues derived from PSL, PSR and Naming/cornerstone sponsorships that were excluded from AR. [Note: This “credit” is generated by team revenues as opposed to expenses.]
  3. For any stadium, new or old, 50% of the cost of capital expenditures incurred during such League Year that relate in any way to the fan experience at such stadium, amortized over five years (except for video boards, which shall be amortized over seven years).

The Stadium Credit is limited to 1.5% of Projected AR and may not exceed it. Once the limit has been reached, additional credits from stadiums that have yet to be included in the calculation will not be allowed. Furthermore, those stadiums which are not part of the calculation are subject to the Cap Effect Guarantee. See Appendix A for an explanation of the Cap Effect Guarantee. Stadiums are included in the Stadium Credit calculation in chronological order. The first League approved project during the term of the 2011 CBA is the first project entered into the Stadium Credit calculation. Furthermore, within in each project, credits listed in bulletpoint #1 are considered before considering the credits from bulletpoints #2 and #3.

10. What is the Cap Effect Guarantee?

Glossary:

Base Year – the final season played by the club in its old stadium before it was either refurbished or the team moved into its new stadium. AR generated in the base year is called the Base AR.

Incremental AR – The additional AR generated in the new (or refurbished) stadium. i.e the difference between Base AR and the AR created in the new stadium.

Exclusion Cap Effect (ECE) – 40% of the amount of revenue excluded from AR because they were dedicated towards a stadium renovation/construction project. This may include Personal Seat Licenses (PSL), Premium Seat Revenues (PSR) and Stadium Naming Rights for the new stadium.

Incremental Cap Effect (ICE) – 40% of the incremental AR from the stadium.

The Cap Effect Guarantee says that in the event that the Stadium Credit was initially calculated to exceed the Stadium Credit Threshold, then for any individual stadium for which PSL, PSR, naming/cornerstone revenues were excluded from AR for that League Year, and were also not included in the calculation determining that the Stadium Threshold had been reached, the “Incremental Cap Effect” from such stadium must exceed the “Exclusion Cap Effect” by 125%. In the event that the Incremental Cap Effect does not exceed the Exclusion Cap Effect by 125% (a “Shortfall”), then an additional amount shall be imputed into AR sufficient to eliminate the Shortfall in the Salary Cap.

For example, if in the 2018 League Year the Stadium Credit is calculated initially to be more than 1.5% of AR (i.e., to have reached the Stadium Credit Threshold), and if Stadium A had an amortized PSL exclusion of $20 million that was not part of the Stadium Credit Threshold, then the Exclusion Cap Effect of Stadium A would be $8 million (40% of $20 million). Under the Cap Effect Guarantee, for this League Year, the League would “guarantee” that the Incremental Cap Effect from Stadium A would not be less than $10 million (e.g., 125% of $8 million). If the actual Incremental AR (from ticket sales, parking etc. but not counting the excluded revenues of from PSL, PSR and Naming Rights that have been excluded) was only $24 million, resulting in an Incremental Cap Effect of only $9.6 million, then $1 million in additional AR would need to be imputed for the 2018 League Year to resolve the $400,000 shortfall so that the Incremental AR would be $10 million, ensuring that the ICE will 125% of the ECE of $8 million. If, on the other hand, the $20 million PSL exclusion was included in the Stadium Credit, then Stadium A is not subject to the Cap Effect Guarantee.

11. What is timeline of the Initial and Final Setting of Salary Cap for an Upcoming League Year?

Prior to the start of each League Year, the NFL and NFLPA will meet for the purpose of agreeing upon the figures to be used for Projected AR and Projected Benefits. These figures will take into account significant changes such as new or refurbished stadiums, modifications to stadium leases and new broadcast contracts or rate changes in any other contracted revenues.

 

Projected AR shall be projected on the basis of: (A) for League Media AR, on the basis of the League Media contracts; (B) for NFL Ventures/Postseason AR, on the basis of League-level contracts and year-over-year growth rates for such AR not specified in a League-level contract; and (C) for Local AR, (1) for gate, on the basis of the average prior-year ticket price (taking into account any announced price increases or decreases for the upcoming season) multiplied by the actual prior-year attendance (adjusted to account for any new or significantly renovated stadiums, relocations, or expansions); and (2) for all other Local AR, on the basis of the year-over-year growth rates, or, in the absence of agreement on the growth rate, on the basis of the annual percentage increase for such revenues over the prior four League Years (using a compound annual growth rate), in either case adjusted to account for any new or significantly renovated stadiums, new revenue streams, relocations, or expansions.

 

Projected Benefits shall be any Benefits projected to be paid (or properly accrued) in the applicable League Year pursuant to CBA. If a particular benefit cannot be reasonably calculated, then, for the purposes of calculating Projected Benefits, the projected amount to be paid for the Benefit shall be the amounts expended by NFL Teams for the same Benefit in the prior League Year.

 

Subsequent to 1) the clubs’ January reporting submissions and 2) the meeting between the NFL and NFLPA to set the methodology of projected AR for the upcoming season (described above), the League accountants shall prepare an Initial Special Purpose Letter which contains the following: 1) calculation of Projected AR and Projected Benefits for the upcoming League Year and 2) initial calculation of actual AR and actual Benefits from the prior league year.  The difference between the projected AR and benefits from the prior league year (which was set before the season) and the actual figures based on the January reports (i.e. after the season) shall be a “true-up” (True Up #1) to be credited/deducted from the Salary Cap for the upcoming league year. For example, based on the calculation of projected AR and projected benefits in February 2014, the salary cap for the 2014 league year was set a $133 million. If based on the January 2015 reports, the initial calculation of actual AR and actual Benefits indicates that the salary cap for the 2014 season should have been $138 million, then $5 million will be added to the 2015 salary cap as a “true-up” (“True Up #1).

By August 30 each year, final reporting packages from the teams will have been processed by the Accountants and the Accountants shall prepare a Final Special Purpose Letter setting forth the final calculation of actual AR, actual benefits and cash spending from the prior league year.  The difference between the amounts calculated in the Final Special Purpose Letter and the amounts in the Initial Special Purpose Letter shall be a 2nd true up to the salary cap (True Up #2) for the upcoming season.  The purpose of the true-ups is to adjust the salary cap to provide the players the amount of player cost they were entitled for the prior league year based on the actual AR generated by the NFL less the actual benefits players received. Continuing with our example from above, if the Final Special Purpose Letter determines that based on final actual AR and actual benefits, the 2014 salary cap should have been $140 million (and would have been had the NFL known in numbers in advance), then an additional $2 million will be added to the 2015 salary cap (in addition to the $5 million previously added based on True-Up #1). All True-Ups are subject to interest.

12. So will all teams have the same salary cap for a League Year?

After the league-wide salary cap is set, individual teams still will not have the same salary cap. There two reasons for this.

Prior Year Rollover:

The 2011 CBA provides teams the option to carry over salary cap space from one League Year to the following League Year. Teams are required to submit notice to the NFL at latest 14 days prior to the start of the next League Year indicating the amount of Room that they wish to roll over. The team can word their request in either a dollar amount (i.e $20,000,000) or a percentage of unused salary cap from the previous season (i.e 100%). As each team will have a different amount of un-used cap space, each team will have a different rollover amount.

Reconciliation of Incentives:

 

Before the season, every player incentive is evaluated and determined to be either Likely to be Earned (LTBE) or Not Likely to be Earned (NLTBE). Incentive amounts that are considered to be LTBE are included in Team Salary for the duration of the season.

 

At the end of every League Year, the NFL prepares a reconciliation comparing the amount of incentives players earned based on the results of the season as compared to the amounts that were included in the salary cap based on the estimate at the beginning of the season.

 

If the initial estimate is less than the incentives actually earned, and as a result, a team exceeds the salary cap, the amount by which the team exceeded the cap will be subtracted from their salary cap in the following season. For example, in 2014, if the Miami Dolphins had LTBE of $20 million, total salary including LTBE of $130, their Team salary cap was $133 million and based on the results of the 2014 season the incentives earned by their players was $25 million, pushing their Team Salary to $135 million, exceeding their salary cap by $2 million, $2 million will be subtracted from their 2015 salary cap.

 

On the other hand, if the initial estimate is more than the incentives actually earned, an amount is be added to the Club’s Team Salary for the next League Year equaling the amount by which such the overage exceeded the Team’s Room under the Salary Cap at the end of a season. Continuing with the example above, if the incentives earned by the Dolphin players was only $11 million, meaning the initial estimate was over by $9 million and the Dolphins had $3 million of unused cap room, the difference between those two numbers, $6 million, would be credited to their salary cap in 2015.