NFL’s new ‘salary floor’ could challenge Colts

Bigger player payrolls under the NFL’s new collective bargaining agreement are expected to make life difficult for small-market teams like the Indianapolis Colts.

The amount teams are allowed to shell out for player personnel is capped for the upcoming season at $120 million, $8 million less than in 2009. But the new agreement requires teams to pay at least 90 percent of the cap.

It’s a mandate that, in the short run, will put the squeeze on franchises that have been staying out of the red by paying only about two-thirds of the cap. The Colts already pay close to the cap. But some experts expect it to double before the collective bargaining agreement expires in 2021, testing the ability of the Colts and other small-market teams to keep up with the 90-percent threshold.

“The salary floor is definitely going to be challenging, but it shouldn’t be a problem for teams that have strong management and manage money well,” said Marc Ganis, a Chicago-based sports business consultant who counts several NFL teams as clients. “The Colts are fortunate because Bill Polian is the best salary-cap manager in the league.”

Polian

Polian, the Colts president, who, along with owner Jim Irsay, was central in helping complete the recently approved deal, says winning games is the key.

“If we manage well, draft well and coach well, we can compete,” Polian said. “You put a competitive team on the field, and a lot of those other concerns are resolved.”

Other concerns include how much small-market teams will have to charge for tickets, concessions, parking and other revenue generators to keep up with the salary mandate.

Since the new agreement stipulates that players get 55 percent of the money from national TV and radio contracts, sports business experts said owners will push hard to increase locally generated stadium revenue to get their share out of the deal.

“The bottom line is, with the way that it’s set up with the salary floor so close to the ceiling, all the teams—whether they’re winners or losers—are going to have to spend a lot of money,” said Mark Rosentraub, a dean at the University of Michigan who is considered an expert on the economics of sports.

How much they’ll need to spend will be determined in large part by the salary cap, the calculation of which is based on league-wide revenue. That number is projected to skyrocket in the next few years as the league renegotiates all four of its television deals.

Deals with CBS, NBC, Fox and ESPN all expire after the 2013 season. After those four deals are renegotiated, presumably in the NFL’s favor, and assuming the economy eventually rebounds, sports business experts have forecast the league will grow from a $9.3 billion business to a nearly $20 billion business.

While the growth is good for the league as a whole, it will boost the salary cap—and floor—putting pressure on teams to raise revenue without alienating fans.

Butts in seats

The new system is going to cause any team that is not filling its stadium some concern, said sports business experts.

That’s a predicament the Colts have avoided. As long as the team has Peyton Manning under contract, they would seem to have few financial worries.

Forbes magazine estimated the Colts had a 2009 profit of $43 million on revenue of $248 million, a number fueled by the league’s national TV contract and a sold-out Lucas Oil Stadium.

But Forbes shows just how tenuous the team’s profit can be and how careful the team has to be with its player payroll.

In 2007, when Indianapolis ran its player payroll up to $153 million, it registered a $17 million loss, according to Forbes. Only when the team brought its player payroll down $21 million in 2008 and another $13 million in 2009 was the team able to ratchet up its profitability.

It’s not hard to see that number going the other way.

If Manning, 35, plays another five years as some football experts predict, that gets the team only halfway through the new collective bargaining agreement. They’d have to play five years without him before the agreement, which has no opt-out clause, expires.

Unfortunately for the Colts, Manning’s retirement coincides with the expiration of many of the leases the team has with corporate partners for the 140 luxury suites inside Lucas Oil Stadium. Those suites were sold on six- to nine-year deals, with the first coming up for renewal following the 2013 season.

So if national TV deals dramatically increase the salary cap, and the Colts can’t re-sign those suite deals and continue to sell out, today’s prosperity could become but a happy memory.

Ticket prices for this season—which are the same as last season—range from $38 to $300 per game. Season-ticket renewal for this season was 95 percent, with the 2,000 open seats snapped up by fans on the 11,000-long waiting list, said Larry Hall, Colts vice president of ticket operations and guest services.

Spreading the wealth

Teams without ticket waiting lists and marquee players are largely at the mercy of the NFL’s much-praised revenue-sharing system to have any hope of remaining financially viable.

Polian said the revenue spread between the league’s richest and poorest teams remains a concern, but he thinks the new collective bargaining agreement and revenue-sharing plan between owners makes the financial playing field more even. Details of the new revenue-sharing pact are scarce.

Polian said one problem it fixes is a disparity caused by new stadiums. Under the old system, most of the additional revenue generated by a new stadium was kept by the team playing in it. Yet that same revenue played a role in driving up the salary cap, causing heartburn for all teams in the league.

It’s not clear how the new agreement addresses that issue, but it does limit how much revenue-sharing a team with a new stadium is eligible for.

Under the new revenue-sharing plan, the 10 richest teams in terms of local revenue share with the five to eight teams at the bottom of that category. Teams with new or heavily renovated stadiums, however, are not eligible for this form of NFL welfare. It’s not clear how old a stadium must be before a franchise is eligible. Playing in a 3-year-old stadium, the Colts would figure to be ineligible for at least a few more years.

The Colts have one big advantage over owners such as Jerry Jones, who put lots of his own money into building a new stadium for his Dallas Cowboys. The Colts don’t have much debt, plus they have a favorable lease deal with the city’s Capital Improvement Board that assures the franchise doesn’t pay anything to operate or maintain the facility. Plus, the Colts get a $3.5 million annual subsidy from the city.

Ganis, the Chicago sports business consultant, said the new labor and revenue-sharing agreements appear to offer plenty of upside, in spite of the salary cap concerns.

For example, much of the “accounting gimmickry” that teams previously employed, such as using bonuses as a way to exceed the salary cap, is no longer allowed.

Overall, Ganis said, the plan contains more revenue sharing than before and “far more than any other professional league shares.”

But there’s no less pressure on NFL teams to raise local revenue.

“There’s always been immense pressure on the teams to maximize revenue from their local market,” Ganis said. “I certainly expect that to continue.”•