Salary Cap Nuggets - No. 4B: How are annual Player Costs and Unadjusted Salary Cap calculated?

This series is called Salary Cap Nuggets because ‘nuggets’ is such an interesting word in English. It calls to mind chicken nuggets - tasty, bite sized and easy to eat. But it also calls to mind gold nuggets - small, but valuable.

The salary cap is a product of the Collective Bargaining Agreement (CBA), which is a 301-page contract between the NFL Owners and the NFL Players Association. In these articles, I try to explore just one or two small parts of the NFL salary cap defined in the massive CBA. Hence, Salary Cap Nuggets - small, bite-sized, easy to digest, yet valuable information for NFL fans.

The goal is to, one bite at a time, get a clear understanding of the salary cap.

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Click this link for handy access to all the Salary Cap Nuggets

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Chicken & Egg

This article focuses on two topics:

• Player Costs
• Unadjusted Salary Cap

In calculating the Unadjusted Salary Cap, the first step is to calculate Player Cost, but this Nugget (#4B) only discusses Player Cost as an intermediate step in figuring out the Unadjusted Salary Cap, which is the real focus here.

So, this nugget will first address Player Cost, but then move quickly to the real goal of understanding how to calculate the Unadjusted Salary Cap.

As the authors of Crunching Numbers so eloquently put it: if there’s an unadjusted salary cap, then there must also be an adjusted salary cap.

Deciding which one to talk about first in the Salary Cap Nuggets series is a bit of a chicken & egg situation, as understanding one involves understanding the other.

I thought about writing one bigger “nugget” article talking about both adjusted and unadjusted, but decided that it went against the spirit of the series, so this article — which is pretty long anyway — will focus only on UNADJUSTED salary cap.

However, I’ll try to address the difference between the two quickly and simply, and come back later and create hyperlinks after I write the ‘nugget’ about adjusted salary cap.

For the moment, here’s my quick-and-dirty distinction:

• The unadjusted salary cap is the same number for every team in the league each season. It is really the starting point. This is the subject of today’s nugget.
• The adjusted salary cap is unique to each team. It includes any salary cap adjustments that apply to that team. The most familiar adjustment for most fans is probably ‘rollover’ of surplus cap from the previous season. Another adjustment can come from incentives earned (or not earned) by players, changing their actual cap hit from what was expected. I will cover adjusted salary cap in a different nugget in the future.

The authors of Crunching Numbers explain the calculation of unadjusted salary cap on page 23 - 26:

League Revenue

The process of calculating the unadjusted salary cap starts with defining sources of revenue, and how that revenue is to be shared between players and owners. This topic is discussed in detail in Nugget No. 4.

Let’s start where Nugget #4 leaves off - with the three revenue buckets, and the proportions used for splitting the money between players and owners.

Non-revenue components of the Salary Cap calculation

Now let’s turn to one other component of the calculation for unadjusted salary cap, the Joint Contribution Credit.

This component is NOT a revenue bucket — there are only three of those. Instead, this component is removed from the league-wide salary cap allocation before determining the salary cap amount for each team.

JOINT CONTRIBUTION CREDIT

The Joint Contribution Credit was discussed in detail in Nugget #2. We’ll look at it again, briefly, here.

These benefits include payments set aside for healthcare of retired players, medical research, and donations to charities of the joint contribution; 47.5% is used as a credit toward player costs.

Again, read Nugget #2 for a more detailed discussion of the Joint Contribution Credit

Now that we know all the components, It’s time to calculate the Player Cost

CALCULATING THE PLAYER COST (Which is not the same as Salary Cap)

[T]he actual cost equation is fairly simple:

Player Costs = (55% x League Media) + (45% x NFL Ventures/Postseason) + (40% x Local Revenues) – (47.5% x Joint Contribution Credit)

Wow. That’s easy!

If everything is copacetic at this point, we can finish calculating the number we’re looking for: the unadjusted salary cap for each team.

However, we can’t ignore that “if everything is copacetic” part.

Protecting the players and owners: maximum and minimum levels for Player Costs

See, there is protection written into the CBA to prevent the result of this calculation from giving some wildly unexpected number.

[T]here are bands around the player costs that set maximum and minimum levels. [I]f the player cost calculated above [is] greater than [48.5%]of total projected revenues, then player costs [are] reduced to [48.5%] of the total amount.

This protects the league from the possibility of League Media growing so large that the players keep too much money, ensuring that they [the owners] always earn over 50% of the revenue.

The players also received a concession that they will earn at least 47% of revenues, protecting them in the event that the NFL Media properties ever becomes a dominant force in the revenue calculations.

Yeah, I’ll cover that one more time.

• Basically, the CBA says that, no matter what the result is from the Player Cost calculation given above, it can’t be less than 47% of revenue (to protect the players) and it can’t be more than 48.5% of revenue (to protect the owners).
• So, if the calculation comes in low (say, 45.85%) then it is automatically raised to 47% so the players don’t get ‘cheated’ by an unanticipated dramatic change in the revenue buckets.
• If, on the other hand, the calculation comes in high, (say, 50.22%) then it is automatically lowered to 48.5% so the owners don’t get ‘cheated’ by an unanticipated dramatic change in the revenue buckets.

In short, the league-wide Player Cost is calculated according to the formula given above, but the result must be between 47% and 48.5% according to the CBA.

A quick acknowledgement of the stadium credit

Once the player cost is determined, the league then applies a stadium credit, which can reduce the player cost to...46%. The stadium credit is capped off at 1.5% of total revenues.

We will effectively ignore the stadium credit for the purposes of this Nugget by assuming it equals ‘zero’. We will deal with the question of Stadium Credits later in the series of articles.

Let’s do a little “case study” to see how all this fits together

Example

• In this example, the Total League Revenue from the three ‘buckets’ totals $13,000,000,000.
• The Total Joint Contribution in this example is $77m. The players’ contribution to that number is set at 47.5%, as explained in Nugget #2, and comes to $36,575,000.
• The calculated (league-wide) Total Player Cost is $6,513,425,000, which is 50.1% of Total League Revenue.
• We know that the CBA limits the Player Cost to no more than 48.5% of Total League Revenue, which you can see from the calculation sets an upper limit of $6,305,000,000.

So, the Player Cost is set to the maximum level allowed; that is, $6,305m. This represents the Player Cost for all 32 teams combined; it is a league-wide number.

At this point, the Stadium Credit is applied. Since we have set it at zero dollars, there is no impact on our calculated Player Cost.

But before the salary cap can be determined for each team, there are a few more steps to be taken.

Getting from Player Cost to Salary Cap

We discovered in Nugget #3 that Player Cost is broken down into two buckets:

• Salary Cap
• Player Benefits

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Remember from high school algebra that if:

Player Costs = Salary Cap + Player Benefits

then

Salary Cap = Player Costs - Player Benefits

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• We have calculated total Player Costs of $6,305m.
• Our goal is to figure out Salary Cap, so the next step is to find the amount for Player Benefits so we can plug that number into our formula.
• The NFL probably keeps at least 100 accountants employed full time to figure out things like the dollar amount of Player Benefits. We’re gonna cheat and just assume an amount for Player Benefits of $750 million.

When we apply our formula to figure out the league-wide salary cap, it will look like this:

Player Costs - Player Benefits = Salary Cap

$6,305,000,000 - 750,000,000 = 5,555,000,000

In our example, the league wide numbers are:

• Player Costs: $6,305m
• Player Benefits: $750m
• Salary Cap: $5,555m

and when we divide that final number by 32, we finally know what we set out to learn: the total unadjusted salary cap for each team.

$5,555m / 32 = $175,593,750

That is the number that the NFL, in our hypothetical example, would announce in press releases, and the number that would dominate NFL Twitter for a day.

In our hypothetical example, with a starting point of $13 billion in total revenue, each team will be allowed the same unadjusted salary cap amount of $175,593,750.

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• Player Costs = (55% x League Media) + (45% x NFL Ventures/Postseason) + (40% x Local Revenues) – (47.5% x Joint Contribution Credit)
• League-wide Salary Cap = Player Costs - Player Benefits
• Team salary cap = League-wide Salary Cap / 32