A financial hurricane is headed straight at the NFL. It will make landfall.
The only question is whether it weakens and causes minor inconvenience or if it strengthens and wreaks havoc.
What kind of havoc? A massive drop in the salary cap leading to a wave of big-name player releases. A little bit of labor strife. Hell for cash-strapped, smaller-market teams. A widening of the salary gap between elite players and the minions. Complications with the next round of TV deals. Basically, a ripple effect that could impact the league for a decade.
How badly would all this hurt the Patriots franchise? Actually, it might help them.
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Here’s the situation. The 2020 salary cap is $198.2M, up from $188.2M in 2019. The cap’s risen by at least $10M every year since 2012. Growth has been strong and uninterrupted and — since there’s been no reason to do otherwise — contracts have been written with that steady cap growth in mind.
The formula is pretty easy. Players get 48 percent of aggregate revenues (AR). Prior to the new CBA which was just ratified in March, they got 47 percent. If you want to read all about it, here’s the CBA.
According to the CBA, “AR means the aggregate revenues received or to be received on an accrual basis, for or with respect to a League Year during the term of this Agreement, by the NFL and all NFL Clubs (and their designees), from all sources, whether known or unknown, derived from, relating to or arising out of the performance of players in NFL football games."
The CBA also states: “AR shall be subdivided into three categories for purposes of calculating the Player Cost Amount and Salary Cap: (1) League Media AR; (2) NFL Ventures/Postseason AR; and (3) Local AR.”
League media is, mainly, the TV deals with the major networks (of which NBC is one). NFL Ventures/Postseason AR is, basically, all NFL-sponsored media (NFL Network, NFL Films, NFL Enterprises, etc.) Local AR is everything else.
With everything surrounding the NFL’s 2020 season in doubt — training camps, the preseason, the regular season — all the buckets may take a hit but the “local AR” bucket could get decimated if there are no fans in the stands, no concessions, no parking, fewer local advertisers etc.
Jason Fitzgerald, founder of the site OverTheCap.com, looked at the Green Bay Packers’ financials from 2019. Since the Packers are the only franchise that is publicly owned, they’re the only one whose financials we can see. But since all 32 teams get the same cut, Fitzgerald did some ciphering and came up with this.
“Last year the Packers received National revenue of $274.3 million with $203.7 million coming from local income. … a fair estimate is that 45% of the league revenue is made up of local revenues and the rest comes from the revenue share from the big media packages…. Based on the recent growth I think the Packers would likely have expected around $208 or $209 million in revenues (in 2021). Lets just call it $210 and pretend that that goes for all teams. If you eliminate 70% of that figure about $78M of the losses would be attributed to the owners and $69M would be attributed to the players.
“Currently there is about an 80-20 split between salary cap and benefits for the player distribution which would mean we would be look at a decrease of around $55 million in cap space, assuming that the benefits are not sunk at a certain number, in which case the cap loss would be more. If you lost all local revenues you would probably be looking at an $80 million loss in cap space while a 40% loss would result in a $31 million drop in cap room.”
The upshot? If the revenue loss is that significant in 2020, the cap could potentially drop from $198M this year down to a worst-case scenario of about $130M.
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According to Fitzgerald’s 2021 projections based on current contracts, all but four teams in the league would be over the cap in that scenario. The four: Colts, Chargers, Jaguars annnnnnd Patriots. Which would mean that — if nothing were done — every team in the league would have to start renegotiating deals and throwing players overboard.
“It would be a pretty chaotic situation,” Fitzgerald told me last week. “Teams will have to scramble to get salary cap space and you’re talking about a real big potential drop. Typically, teams budget with a gain of probably $10-to-$12M a year on the salary cap. Maybe they were expecting a little bit more with new television deals coming in (after 2020). And now you’re talking about a scenario where the cap could drop anywhere from $20M to $40M to $60M depending on if fans are allowed at games and how they’ll be able to spend money if they’re in those games. … (The local AR) is basically anything the NFL makes money on that’s not national and a lot of it is based on the fact that you need fans in the stadiums.”
To be sure, this is not coming as news to either the teams or the players.
In fact, there’s a provision in the CBA that accounts for cancelled games.
(xii) Cancelled Games. If one or more weeks of any NFL season are cancelled or AR for any League Year substantially decreases, in either case due to a terrorist or military action, natural disaster, or similar event, the parties shall engage in good faith negotiations to adjust the provisions of this Agreement with respect to the projection of AR (all revenues) and the Salary Cap for the following League Year so that AR for the following League Year is projected in a fair manner consistent with the changed revenue projection caused by such action. (CBA, Pg. 99)
No doubt, the owners and NFLPA are already working on plans to address this with the aforementioned “good faith negotiations.” Or are at least noodling on how to do it. But with so much uncertainty and so many hypotheticals, there’s been only silence so far.
Still, we are already seeing this affecting business. Rookie contracts for this year are being signed at an historically slow pace. The Patriots were the first team to get its entire rookie class under contract. Few have since followed suit.
“I think a big part of that is that a good portion of the signing bonus those guys get — which is a large portion of their contracts — gets paid within two weeks of signing so I think teams are looking to horde cash right now just to prepare for the unknown," Fitzgerald added. "If they can push things with a rookie until August, they’re probably gonna do that.”
Teams with big-ticket players seeking long-term deals — like Cowboys quarterback Dak Prescott — have to be sweating how to structure those deals. Meanwhile, smaller-market teams that have less cash-on-hand are going to be even more challenged.
Pete Kendall, a 12-year NFL veteran from Weymouth who went to Boston College and was a first-round pick in 1996, was a key figure in the NFLPA as a player. His acumen and perspective was so valued by the union that, in 2011, he was asked by NFLPA President DeMaurice Smith to help guide the last CBA negotiations.
“There’s a couple of ways this could go,” said Kendall. “You’re almost certainly going to see a decline in revenue from ‘19 to ‘20 so how does that get adjusted in '21? I think that there’s a mechanism in the CBA that would, if it were allowed to run its course, account for a reduction in the salary cap but that could bring on a whole host of problems including teams having to let go of players they don’t want to let go of knowing there will be a market around the corner in some other city for them.
“You could do what was done in the early days of the previous CBA which is to borrow against future years' caps. Would that lead to some owners having to take out some loans in order to fund the cap going forward? My suspicion is no, but I don’t know the inner workings of all 32 clubs. Then, how would that expense be recognized by the players?”
Agent Joe Linta, who represents Joe Flacco and has had a number of Patriots as clients through the years, speculated the NFL could soften the blow of the expected drop in 2021 by spreading the loss over a three-year period.
“I do think there is motivation and incentive for both sides not to allow a precipitous drop on the cap if the revenues fall as much as they might with empty stadiums,” said Kendall. “Both sides will try to do whatever they can to make any drop palatable and digestible. I don’t think it’s a good look for the league, quite frankly, to be talking about a salary cap that’s almost $200M to talk about a cap that falls below $150M.”
Fitzgerald agreed with Linta’s speculation.
“(Linta’s) right about the way they should approach it or will approach it, which is to have the cap stagnate for a couple years and then paying back whatever that shortfall is,” he said. “My guess is it would be over a three-year period just because of the way rules are set up for how much the teams have to spend in a three-year period as a percentage of the cap, so it may run from 2021 to 2023. It’s not a good situation for anybody.”
No it’s not. But for a small number of teams — the Patriots at the head of that list — it’s not only less dire, it could present an opportunity.
This year, they are extremely tight to the cap and are carrying significant dead money from players no longer with them like Tom Brady, Stephen Gostkowski, Michael Bennett and Antonio Brown.
But next year, they project to have just $124M allocated to the 55 players currently under contract.
They have some significant players with expiring deals: Joe Thuney (currently franchised), Dont'a Hightower, Mohamed Sanu, Jason McCourty, James White, Lawrence Guy, Adam Butler, Rex Burkhead and David Andrews. But Thuney, White, Butler and Andrews are the only ones under 30 at this time so the team may be saying so long to some of the others.
If the team had a big-ticket quarterback to pay — like the Cowboys do with Prescott and the Chiefs with Patrick Mahomes — or if they signed on for another year of Brady, they’d be worse off. But currently, the team is paying a combined $3.5M for Jarrett Stidham, Brian Hoyer, J’Mar Smith and Brian Lewerke.
There are 35 quarterbacks across the NFL who will make more in 2020 than the Patriots' four quarterbacks make combined.
And if it comes to pass that most of the league has to make painful cuts? The Patriots are in prime position to go shopping.
“It’s a tough situation for the players and it’s why (the two sides) have to come to some kind of agreement by the beginning of August as to how to handle this,” said Fitzgerald. “If they don’t do that, if you’re a team next year like the Eagles, Falcons or Steelers that’s looking at being $5M over the cap in 2021 (currently) … to go from that to being $50M over the cap, you need to start cutting players this August to get under the cap if that’s going to happen. If you have veterans that are making $4M or 5M that are kind of bubble guys, getting 30 percent playing time you probably want to look at cutting those players this August if you have no idea how this is going to play out.”
At this point nobody does. But it’s coming. One way or another.