NFL Salary Cap – Calculating Player Costs

With so much fascination and interest in the economics of professional football, I thought it was high time to start a series of posts on the NFL Salary Cap, NFL Player Contracts, and the dynamics that affect a GM’s handling of both.

TGC Money PuzzleSo the best place to start is to truly define what pieces of the puzzle go into making the NFL’s Salary Cap for all 32 teams.  For some of the more hardcore NFL fans this may be a review, but for many of you it’s probably the first time you’ve seen the actual makeup of this “mysterious” ceiling that either helps or hinders your club’s chances of making a run at a Super Bowl Championship.

Straight from the pages of a document as sacred to some as the Declaration of Independence (that may be taking it a bit far), the following statements from the Collective Bargaining Agreement (CBA) are pretty cut and dry.  “You all have the same amount to spend, don’t spend anymore than your amount.”  Or is that really the case?

  • Section 1. Calculation of the Salary Cap: The amount of the Salary Cap for any League Year shall be determined in accordance with Article 12. The Salary Cap is the same amount for each Club.
  • Section 2. Application of the Salary Cap: No Club may have a Team Salary that exceeds the Salary Cap.

TGC Goodell and SmithThe actual “NFL Salary Cap” is the result of a carefully negotiated formula between the lawyers of the NFLPA (Player’s Union) and the National Football League and defined by Article 12 of the CBA.

Salary Cap. The Salary Cap for a League Year shall be the Player Cost Amount for that League Year less Projected Benefits for that League Year, divided by the number of Clubs in the League in that League Year, adjusted by any applicable True Up, provided further that there shall be no True-Up related to the 2011 League Year, and there shall be no “negative”  True Up related to either the 2012 or 2013 League Year.

Say what?  How do we get to the Player Cost Amount so that we can subtract the Projected Benefits so that we can figure out what our Salary Cap is?

Player Cost Amount is calculated by the sum of;

  1. 55% of League Media (All Revenues – AR)
  2. 45% of NFL Ventures/Postseason (AR)
  3. 40% of Local (AR), and if applicable;
  4. 50% of the net AR for any new line of business projects.

Then subtract the 47.5% of the Joint Contribution Amount (JCA).

Starting in 2012 the JCA was set at $55 million and increases by 5% each subsequent League Year of the CBA.

  1. $22 million is set aside for healthcare or other benefits, funds, or programs for retired players
  2. $11 million dedicated to medical research, as agreed to by the League & Players Union
  3. $22 million dedicated to charities as determined by the NFL, including NFL Charities and/or Youth Football or successor organizations.

*These amounts are adjusted pro rata to reflect the yearly increase of 5%.

TGC NBC FOXSo what exactly makes up the revenues of League Media? 

  1. Television rights sold nationally or packaged regionally on broadcast, cable, satellite, internet, or other media (paid by FOX, CBS, ESPN, NBC, DIRECTTV).
  2. International television rights.
  3. Terrestrial, satellite, or internet radio (paid by Westwood One & Sirius).
  4. Copyright Royalty Tribunal.

TGC NFL NetworkWhere does the revenue from NFL Ventures/Postseason come from?

  1. Revenues from NFL Postseason games received by the NFL or NFL affiliates (excluding League Media revenues)
  2. Revenues from the operation of NFL affiliates which includes NFL Ventures, NFL Network, NFL Properties, NFL Enterprises, NFL Productions, and NFL Digital (including NFL.com and NFL Mobile).  And this includes such things as the RedZone Channel, NFL Digital agreements with Verizon, NFL Digital’s Game Pass, NFL.com’s Preseason Online, and NFL Films agreements with ESPN.

What exactly constitutes Local Revenues?

All revenues received or to be received by club & club affiliates that are not included in the League Media & NFL Ventures/Postseason revenues.  That also includes the individual sale or licensing of club preseason game television rights.

The agreement makes clear that revenues cannot be in more than one of the above categories, but however must be included in at least one of the above categories.  No double dipping, but no outright avoidance either.

Most fans outwardly understand the importance of these three “revenue buckets” and quickly identify them as the primary source for most of the NFL’s profits.  It’s here where the clause “divided by the number of Clubs in the League in that League Year” gives hope to the equal pursuit of player talent regardless of club, division, or conference.

TGC Cowboy StadiumThe NFL owners negotiated a ceiling over Player Costs if before the application of the “Stadium Credit” the amount exceeds 48% of Projected Revenues, it reduces the percentage to a set amount (48%) from 2012-2014 and then again (48.5%) from 2015-2020.  The NFLPA then countered with their own floor that raises that percentage amount should Player Costs fall below 47% from 2012-2014, 46.5% from 2015-2016, and 46% from 2017-2020.  Players Costs will raise to the said percentage for the given time frames listed.

We’re not quite done with the idea of determining Player Costs but hopefully you get a better understanding of how these “buckets” are filled.

I’ll define the complexities of the “Stadium Credit” in my next post as we continue to pursue the eventual calculation of the NFL Salary Cap.

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