How the NFL Salary Cap is Calculated
Forget about the Super Bowl, all 32 teams are currently facing the same issue: nobody knows what the 2021 salary cap will be.
This calculation will have significant ramifications, especially for teams $110m over the projected cap.
Let’s take a step back: how is the salary cap calculated every year?
Before each season, the NFL and NFLPA hire a set of accountants who help them come up with projections for all forms of league revenue. What is league revenue? Nearly every dollar that flows into the league/teams, with some carve outs, is combined into “All Revenues.” As you’d expect, all regular season, preseason, and postseason ticket revenue, concessions, parking, advertising, sponsorships, gambling related revenue, TV deals, etc are included.
Those revenue sources are divided into 3 buckets and the players/owners split each one based on percentages defined by the collective bargaining agreement. For example: players get 55% of projected media money, 45% of projected NFL Ventures/postseason revenue, and 40% of local revenue. The CBA is also negotiated in a way that there is a maximum and minimum % of total revenue that can go to the players.
This is important because, as you know, the NFL collected a ton of media revenue this season but not a lot of local revenue (tickets, concessions, parking, etc).
So the accountants come up with these projections, hand them to the NFL, the percentages are applied, and we’ve got the amount of money that will be spent on players in the upcoming season. This number is more than just the salary cap, it includes player benefits too.
The accountants write one of these letters to the NFL after every season. They not only include projections for next year’s cap, but also a reconciliation of last year’s projection with the actual results. This creates a “true-up” where one party makes up for the shortfall. For example, if the cap for each team is $198m and should have been $199m, that $1m is added to each team’s cap the next year to make up for it.
This year is unique. Sometime soon, the NFL will be getting a letter saying the projection of $198.2m for 2020 was way too high and the true number should have been closer to $100m. The NFL and the NFLPA addressed this in the offseason. They agreed that for the 2020-2022 seasons, the salary cap would be no lower than $175m. In return, the players would make up for any shortfall with interest.
So the floor is settled, but is it possible for the 2021 cap to come in above $175m? Here’s what matters. Everyone is working right now on revenue projections for next season. It’s a tall task. There’s no way of knowing for sure how many stadiums will allow fans or whether they will be anywhere close to max capacity. If both parties can’t agree on a set of projections, the CBA has this passage regarding what to do for all three buckets of revenue:
“In the absence of agreement of the parties otherwise, 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)”
My assumption is that it’s in everyone’s best interest to come up with a projection, because going by actual prior year attendance would result in a low projection.
Then we use this formula to determine the cap for each team:
“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.”
Remember how benefits are part of the calculation for players? They’ve already been cut to the bone, resulting in an estimated $17m savings per team. Keep that in mind. Players’ pay is getting reduced beyond just the salary cap.
What about if the NFL signs a new wave of TV rights deals? Say the NFL was able to negotiate new TV deals after the 2021 projected salary cap was released, the cap would immediately be updated to include the new figures:
“If, after the initial calculation of Projected AR for a League Year, a new League-wide television contract is entered into for that League Year, such amounts shall be substituted for the amount for League-wide television revenues previously included in Projected AR… The Accountants shall calculate a revised Projected AR, Projected Benefits, and Projected Player Cost Amount within fourteen (14) days of the triggering event, and the Salary Cap shall immediately be adjusted accordingly…”
That would work in the players’ favor, but how about the forces working against them? Beyond slashed benefits and absurd interest payments on true-ups, surely there is more I’m missing.
Further reading: