What is the NFL COVID True-Up?

Last night I pored over the NFL and NFLPA’s amendment to the CBA with regard to the economic effects of COVID. The letter is a mere 14 pages compared to the behemoth of a collective bargaining agreement, but there are several intricacies that deserve further attention.

The best place to start is asking why this letter was needed in the first place. The primary concern is the salary cap. Prior to each season, the NFL and NFLPA work together to project the salary cap for the upcoming season using a formula spelled out in the CBA. They forecast changes in revenue across the three main buckets which combine to form all revenue (referred to as “AR”). These buckets are (1) League Media AR (2) NFL Ventures/Postseason AR, and (3) Local AR. League media consists of TV contract revenue, NFL Ventures refers to revenue from the NFL Network and other related companies, and local revenue consists of everything else (ticket sales, concessions, parking, etc.). 

Here’s the rub. After each season ends, the NFL goes back through all these buckets of revenue and comes up with the true amount of AR. Then, the salary cap is adjusted going into the next season through a “true-up” that accounts for the difference between the projected cap amount and what the actual cap amount should have been. 

For example, in a normal use case, projections may have been off for concessions and parking in a new stadium. There may even be more revenue than expected from the playoffs. The following season, there would be a modest adjustment upward or downward to each team’s salary cap to account for the difference.

This year presents a truly unique scenario. Following the 2020 season, whatever is played of it, the NFL is going to find massive revenue shortfalls from their projections. According to the CBA, that would decrease each team's 2021 salary cap by an unprecedented amount. To remedy the situation, the NFL and NFLPA agreed to the amendments in this document. 

First, several player benefits are eliminated for not only this season but most likely future seasons as well. These include the Player Annuity Program, Performance Based Pool, Tuition Assistance Plan, and Pro Bowl Game pay, among others. Going back to the calculation of the salary cap, the calculation of benefits works in a similar fashion. With the three buckets of revenue comprising AR, a predetermined percentage is allocated to player costs overall (salary cap and player benefits).

Instead of taking a hit to this season’s salary cap (which would be difficult because drastic shake-ups would be required), the NFLPA agreed to eliminate these benefits. Either way, the money comes out of player costs. All in all, the estimated savings are $17m per team this year. Those benefits are unlikely to return in 2021, because there will still be a shortfall that needs to be accounted for. That will come out of the 2021 salary cap.

Additionally, instead of feeling the pain all at once, the NFL and NFLPA agreed to a salary cap floor of $175m per team in 2021. For reference, the 2020 salary cap is $198.2m. Implementing a salary cap floor necessitates a special “COVID True-Up” that will spread the shortfall (between the projected cap and the retroactive, actual cap) out over the next three seasons if need be. Unless agreed to otherwise, the amount would be spread equally over the 2021, 2022, and 2023 seasons.

This is where the details are everything. I will preface this by saying I have not read the entire collective bargaining agreement, nor do I know anything about how this negotiation went. To the best of my knowledge, the players had some leverage due to the lack of a force majeure clause in the CBA. However, after more digging, there would never have been a situation where the season was canceled and players were paid their full salaries. 

With that being said, I challenge you to find even one person who has mentioned the interest that will be paid on this 2020 COVID True-Up. Page 2, section 2a of the new agreement reads “The 2020 COVID True-Up shall be spread, with interest at the rate of 3% per annum, as a credit (deduction) to the Salary Caps in the 2021, 2022, and, if necessary, 2023 League Years.”

I read this and didn’t think much of it until looking through the 439 page CBA. There are a couple of paragraphs in there that deal with discounting payments and interest rates. You need not look past page 2 to find the agreed upon definition of “interest.” Page 2 states “‘Interest’ means interest calculated at an annual compounded basis using the one year Treasury yields at constant maturities rate as published in The Wall Street Journal on February 1 (or the next date published) of the League Year in which the amount to receive interest accrues, is awarded, or occurs as the case may be.”

If you look up the latest 1-Year Treasury Constant Maturity Rate, you’ll see that it’s 0.13%. That’s less than 3%, less 2%, and certainly even less than 1%. Why would the NFLPA agree to this? Let’s say that the true-up is spread equally through 2023. That’s hundreds of millions of dollars, if not a billion dollars, that the players are collectively paying 3% interest on. Baffling. Then, should the 2021 season have a true salary cap below the agreed upon $175m floor, we’re looking at a 2021 COVID True-Up in addition to the one for 2020. 

Conversely, there will not be any chaos next season with the franchise tag or restricted free agent offers. As a background, there are certain qualifying offers that teams can make to players that are tied to percentages of the salary cap. To quickly summarize, using the non-exclusive franchise tender as an example, a player is offered a one year deal for the higher of (1) 120% of his prior year salary or (2) the “cap percentage average” of the highest paid players at his position over the past five seasons. There are several scenarios like this one where the salary cap affects a player’s future salary. To remedy the situation, the original 2020 salary cap amount will be used for calculations next season. Section 1d states “For the purposes of calculating all other CBA mechanisms that are based on the Salary Cap or its year-over-year increase (e.g., Qualifying Offers), $198.2 million shall be used as the 2020 Salary Cap.” 

All of this just covers the first 4 pages of the economics agreement. Next, we’ll talk about payments to players, what happens if the season is cancelled at various dates, and when these benefits can be paid retroactively. Then we can turn our attention to the new operations agreement. Hopefully you are even half as excited as I am.