What Could Happen to the Salary Cap in 2021

One of the questions I have been getting over and over recently has been what happens to the salary cap next year if the NFL season is impacted by the Covid-19 pandemic. I talked about it a little bit on last weeks podcast and thought I would expand on it In a post. Obviously this isn’t something I (or anyone at the moment) would have a firm answer on but it is something that we can at least speculate about and discuss.

While the topic of cancelled games and their impact on the salaries of NFL players, contract length of NFL player contracts is not defined there is one section of the CBA where they do discuss the potential impact of cancelled games,

“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 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.”

What that tells me is that one the salary cap for 2020 by no means will be changed and that two the salary cap in 2021 can be changed, significantly, based on how much revenue is lost this season.

There are a few scenarios that are at play here. One is we have a major recovery by mid July and everything proceeds as normal with the NFL getting a full preseason, training camp, and so on. In that scenario nothing changes beyond just whatever lingering impacts there may be that drive certain sales and ad revenues down. In every other scenario the results should be much more impactful.

The other options would be some type of shortened season where they pick up camp in the fall and start the year in late October or early November. Perhaps a full season with no spectators or very limited spectators (say 1/3 capacity).  That could happen either at home or in some type of neutral site season if some states do not allow sports while others do.  Of course there could be no season at all which I think is the most unlikely but would certainly hurt the league.

The NFL essentially makes its revenue, which is what is used to calculate the salary cap, through three sources. Two are national in scope. The Tv Rights package is the big money numbers we always here thrown around about how much NBC, CBS, Fox, ESPN, DirectTV, and various internet properties and national radio entities pay for the NFL. In the prior lockout of 2011 there was talk that the TV contracts called for payment even if the NFL doesn’t play so perhaps these revenues are safe but we don’t really know one way or the other. For the sake of this lets assume they are ok if the NFL plays a majority of the year.

The second source is NFL Ventures. This is the revenue associated with the NFL Network and Red Zone channels along with money paid for the postseason, Game Pass, NFL Network games. etc…The impacts here probably depend on how much of a season there is. If there is no season I would guess people will begin to cancel their various subscriptions. Who know if there will or wont be a Thursday game package to license. My guess is most people are like myself and only carry the NFL Network and Red Zone packages through cable for the access to Thursday games and in season programming. The offseason stuff is fine and something to throw on the TV once in awhile but if there were no games on the Network I doubt I would subscribe and obviously Im a big fan of football. Still its hard to project what is and is not tied to these revenues.

The third source is local revenues. Local revenues are those that come for the operation of games . Ticket sales, stadium sales, merchandise, preseason rights fees, local radio rights, sponsorships, and so on… This would seem to be the things most impacted by any season that doesn’t take place in the home market or does not allow the attendance of fans to watch the games. There is potential for this part of the equation to more or less vanish.

The NFL has a formula by which they allocated the money from the various sources but with bands that essentially keep spending no matter what at 47% of revenues we can guesstimate that 47% of lost revenues will be allocated to the players.

How much will that be is a good question. The best that we can do to estimate anything is to look at the Packers financials which separate their revenue into National and Local income. Last year the Packers received National revenue of $274.3 million with $203.7 million coming from local income. The prior year the numbers were $255.9 and $199 million. Now the Packers may be understated a bit since they are considered a smaller market team and I don’t think these numbers would make it to the players share the last few years, but it would be close so lets say 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.

Clearly this is going to be a big number. Based on the recent growth I think the Packers would likely have expected around $208 or $209 million in revenues. 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.

None of this takes into account the loss of national revenues but even if that is a small number (and there will likely be some loss) my guess is that you are looking at the cap to drop anywhere from $40 million from projections to $85 million from projections for 2021. This would assume that 2021 growth remains steady pace from where 2020 was expected to be. We had projected a cap of about $215 million in 2021 based on players share increasing from 47 to 48% so anywhere from $130 million to $175 million. $130 million is where the NFL was in 2014 to give some context to it.

The higher number would result in about 14 teams projecting to be over the salary cap in 2021 and that doesn’t include rookies from this year since none are signed yet, so probably half the NFL. The big number would see all but four teams over the cap and really is not even workable.

Now the way that clause is written in the CBA it sounds as if the entire loss would be reflected the following year but I would imagine there has to be some wiggle room for a side negotiation to find a way to basically borrow from future salary caps to prevent teams from cutting most of their roster. Owners would probably hold more of the cards in this situation since they are the ones taking the massive hit and can start cutting players.

This is a situation that probably should be discussed now with the union rather than waiting. Why do I say this?  The main reason is because as teams become more aware of this seasons outcome they will likely begin cutting veterans with non guaranteed contracts left and right to cut down on costs for the year and to maximize cap carryover for 2021. Almost every team in the NFL has already met the spending threshold for the current four year spending period so they can almost all run like the Dolphins did last season without worry.

But would there really be a reason to carry the player who is going to earn between $3 and $9 million who may be a situational player or one only on the team due to some cap considerations in 2020? Teams keep players sometimes hoping they can get one last year out of them if the cost to cut and cost to keep are close, but you can probably throw all of that out the window if you are expected to lose $100 million on the year and still face a situation next year where you have to make crazy decisions to be cap compliant and to find ways to make up for all the money that was lost in the Covid crisis. Cutting now and saving the salary lessens your losses on the year and increases your cap room the next year assuming the player was a likely cut anyway.

In addition if there is no season there is no reason to even consider paying players in the last year of their contract if their contracts will expire anyway or paying players who are of limited contribution anyway to the team.

The thing is the owners will have an idea by mid summer as to how dire the situation is and what their legal options are with these contracts. There should be a way to avoid this and make everyone make the best of a bad situation but if they don’t negotiate it early there are going to be some players whose fate is simply going to be a byproduct of the projected revenue loss and concerns for 2021. They can always hire the players back if the season returns or if they need them the next year, likely at a reduced cost.  Waiting until the season is on the brink to figure out the plan would be negligent on both sides. Perhaps they are already discussing this but they have to determine how to handle this years contracts and next years salary cap if they land in a situation where the season is going to be very different than usual. If they aren’t discussing it someone should get them to the table ASAP to do just that.