NFL Economics Primer
This is the definitive behind-the-scenes economics primer for football fans going into the 2020 NFL season. We’ll cover issues including the new practice squad rules, changes to IR, updated CBA terms, and comparing recent QB contracts.
Will teams manipulate the NFL practice squad this season?
NFL practice squads are viewed by some as the equivalent of a AAA baseball team. Young players without much, if any, NFL experience are given valuable practice time and wait in the wings for a call-up to the main roster. Each team has only been able to keep a 10 man practice squad in the past and, even before the virus, the rules are set to change.
For the 2020 NFL season, each club can field up to 16 players for their practice squad. However, the additions may benefit veteran players more than young players fighting to carve out a role. According to the amended CBA will “permit a Club to have a maximum of six (6) free agent players with no limitations as to their number of Accrued Seasons on the Club’s Practice Squad.”
The increase in practice squad size may present contrarian effects similar to the rookie wage cap. Remember how capping rookie wages was supposed to increase money paid to veterans, but then teams began building rosters centered around cheap labor while carrying over millions in cap room each year? Now the counterintuitive results will reverse. Instead of developing a larger group of developing players, teams may employ a different strategy. One that is centered around manipulating the practice squad regarding veteran players. As we’ve already seen, 41 year old quarterback Josh McCown is on the Eagles’ practice squad.
Additionally, each team will be able to designate up to 4 practice squad players as protected each week. That means another team won’t be able to poach those players until after games are played that week. The designation can happen after 4:00 pm on the Tuesday of game-week, so there is a one day window each week to go after players that may be designated as protected.
What about changes to the IR?
My interest in the IR originated with fantasy football, but there are real competitive effects to this year’s changes in policy. Previously, the NFL started allowing players to return from the Injured Reserve midway through the season. However, they had to be designated to return. Teams had to know in advance the likelihood of a player coming back from an injury that could take months to heal.
This season, “each Club will be permitted to return to its Active/Inactive List an unlimited number of players placed on either the Reserve/Injured or the Reserve/Non-Football Injury/Illness list after… Sunday, September 6 (the day following the roster reduction to 53 players).”
This is similar to existing practices. If you believe that a player can return mid-season and they’re injured in training camp, they have to be on the active roster for Week 1 of the regular season. This means that one of your initial 53 roster spots is being taken up by an injured player. Instead of going out of your way to keep players on the Week 1 53 man roster, how about scenarios where you want to keep players off the roster that same week?
Cutting veterans right before the season starts is an unfortunate reality. If a vested veteran (4 or more accrued seasons) is on a Week 1 active roster, his base salary is guaranteed for the season. This is why you’ll see vested veterans signing with teams after Week 1 as opposed to being signed right now. Their contracts won’t become guaranteed. Even if they sign next week for the veteran minimum, the team can cut them mid-season and save some cap space.
Building a practice squad
The Motley Fool recently interviewed Morgan Housel about his new book, The Psychology of Money. The issues Housel talks about are very prevalent in today’s economy with all the volatility and departures from the norm. In particular, he emphasized the lack of insight into the motivations and goals of each player in the financial market. For example, older people saving money for retirement are very different from high-frequency traders, and they are very different from short-term day traders, and they are very different from hedge fund managers. The same issues apply to compiling a practice squad.
Information may not even be relevant to you depending on your goals. As Housel says, “it is so important for investors to make sure that when there are changes in daily prices… that you are only taking cues from those signals in terms of it changing your behavior. If those cues are coming from people who are playing the same game as you are. If Apple stock is down this morning, that might be very relevant information if you are a day trader. If you are a day trader that might be the most important, rational information for you to pay attention to. If you are a long-term buy-and-hold investor, that information is not relevant to you at all. It’s not part of the game you are playing, you’re playing a completely different game.”
Let’s take this idea and apply it to the NFL. With practice squads, we know the rules will be different this year. So, how do we predict what will happen? Knowing what teams are looking for is especially important for players looking to end up on a practice squad and agents helping them get there.
Bill Belichick was asked recently how the Patriots will approach putting together their practice squad. He explained the various reasons why players end up on the practice squad, whether it be to maintain a certain quality of practice, attempt to progress a development player, or other various reasons. Needless to say, there is a different reason and purpose for each player on the practice squad, either filling a need or a potential need.
Putting a ribbon on it.
It all ties together: practice squad rules, injured reserve designations, vested veteran salary guarantees. Managing an NFL roster is an art, and decisions will only become more intricate this season.
With all the negotiations between the NFL and the NFLPA, first with the new CBA and then with these amendments, the players have to make sure their best interests are taken into account. What I don’t want to see is a slew of veterans suffering collateral damage. Compared to other sports like baseball, the NFL gave its players a very narrow window to commit to playing the full season or walk away. Ironic, considering NFL players have arguably the least job security of any professional athlete.
QB contract breakdown: Mahomes vs. Watson
Background
Patrick Mahomes and Deshaun Watson were drafted two spots apart in the 2017 NFL Draft. Going into the 2020 season, each was under contract for two more seasons (the 2020 and 2021 seasons) after the Chiefs and Texans both exercised their fifth year options.
Additional years under contract
Mahomes and Watson took different approaches with their new deals. Mahomes is locked into a longer-term deal with the Chiefs. Watson only added 4 new years to his deal, allowing him another opportunity to hit free agency while still in his prime.
Guarantees at signing
My personal belief is that the NFL’s escrow rules for guaranteed money was the reason for the structure of Mahomes’ deal. If you recall hearing about his deal, there was talk of “guarantee mechanisms.” At signing, Mahomes was only guaranteed to see $63m, just 14% of the $450m total contract value. However, with these guarantee mechanisms, future salaries and roster bonuses become guaranteed on a rolling basis. On the other hand, Watson received nearly $74m guaranteed at signing, 47% of his total contract value.
Ripple effects
Another instance where interest rates are important. I’m fascinated by the structure of guaranteed contract funding in the NFL. You may be unfamiliar with this provision in the CBA because it’s rarely talked about. To comply with this provision, teams are required to put into escrow the amount of money that is guaranteed to be paid to a player in the future. This does not include injury guarantees, only guarantees that are highly unlikely to be voided (see Earl Thomas).
Don’t underestimate its importance because this was likely a point of contention in collective bargaining. Upon further examination of the 2020 CBA, Article 26 Section 9 “Funding of Deferred and Guaranteed Contracts” has different language than the 2011 CBA. The NFLPA certainly took steps to remedy this issue for players. The new CBA allows for a $15m discount to the amount of guaranteed money to be placed in escrow. Previously the discount was just $2m.
In 2011 the CBA read “the NFL may require that by a prescribed date certain, each Club must deposit into a segregated account the present value, calculated using the Discount Rate, less $2,000,000, of deferred and guaranteed compensation owed by that Club with respect to Club funding of Player Contracts involving deferred or guaranteed compensation.” The new CBA, signed this year, reads “the NFL may require that by a prescribed date certain, each Club must deposit into a segregated account the present value, calculated using the Discount Rate, less $15,000,000 (the “Deductible”), of deferred and guaranteed compensation owed by that Club with respect to Club funding of Player Contracts involving deferred or guaranteed compensation.”
Conclusion
Like with finance, we need to take into account more variables than just the nominal total. In this case, the total contract value is analogous to a stock’s share price. To get a company’s market capitalization we need share price AND share volume. For NFL player contracts we need contract value and contract structure. In this case, that’s guaranteed money.