DATE: November 16, 2015

FROM: Tyler Haertzen

TO: Dr. Stanley

SUBJECT: Collective Bargaining and its Accounting Impact on NFL Franchises

Introduction

The purpose of this memo is to describe to the reader the basic structure of the NFL Collective Bargaining Agreement and its impact on the accounting decisions of a traditional franchise in the National Football League. Just like most other businesses, an NFL franchise is a business whose goal is to generate as much profit as possible while precisely adhering to specific rules and regulations of not only the IRS, but also the league itself. This mainly includes the league’s Collective Bargaining Agreement, which contains certain rules that owners have creatively exploited. The activities of franchise league owners are often viewed as being limited to acquiring, managing, and trading players, but few understand that there are complex accounting practices that go on in the team offices that make all of these transactions possible. The following paragraphs will begin to examine what NFL franchise owners have to account for with the CBA and how they maximize profits with these limitations.

What is the CBA?

The NFL’s Collective Bargaining Agreement (CBA) is an agreement between the franchise owners of each NFL team and the NFL Player’s Association. It is split into two separate concepts that are also intertwined: revenue sharing and player compensation. The NFL uses these two components to promote competitive balance in the league, and it is something that owners must constantly be aware of and properly account for in order to be in good standing with the league. The idea of revenue sharing is comprised of certain percentages of each teams’ revenues being dumped into a general pool. The revenue that goes into this pool is split to lower revenue-producing teams. The challenge that NFL owners face with revenue sharing is that larger market teams with higher revenue must give more to the pool and in return only receives the same amount that a lower market team receives, who contributes much less to the general pool. This is where creative accounting comes into play for these owners. Not every form of revenue is classified as “shared revenue.” There are unshared revenue proportions that owners can capitalize on to generate as much profit as they can under the CBA. The challenge for owners is how to share as less revenue as possible while generating the maximum unshared revenue for the franchises’ own financial interest. (Hunt, 2011)

The other component of the CBA, player compensation, is extremely subject to accounting practices that owners use to maximize their own financial gain under the limitations of the CBA. What drives this component is what is known as the “salary cap,” which is a ceiling for which cannot be exceeded that limits the amount that one team can spend on player salaries. This is another effort by the NFL to create competitive balance between each team. In order to create as much profit as possible the NFL team owners are always attempting to decrease the cap and maximize revenue from ticket and merchandise sales. They face a constant battle with the NFL Players Association, who understandably is always trying to increase the cap so the players can receive as much compensation as they can get under the agreement.

The Revenue Sharing System

The NFL’s revenue sharing system is widely known as the most successful in American professional sports. It began to take its current shape in 1995 when Jerry Jones, owner of the Dallas Cowboys, disputed NFL Properties as the exclusive rights holder of all national sponsorships and marketing agreements for unshared streams of revenue. (Forbes.com) This created a separation for NFL teams between local marketing revenues that are unshared and national marketing revenues that are shared between each team. Before Jerry Jones challenged this separation, all marketing revenues were shared between each team, creating an imbalance for teams in larger markets, such as the Dallas Cowboys, who could not capitalize on local marketing income.

In the 2001 and 2006 CBAs, a restructuring of incentives made it more profitable for teams to build brand new stadiums or undergo major renovations. After these new agreements, it was agreed that franchises would not be subject to sharing revenues that are generated from luxury boxes, suites, or personal seat licenses. Personal seat licenses are taxes on ticket holders that give fans the right to purchase a certain seat and season tickets for that seat. Increased percentages of box and suite seating, as well as personal seat license revenue, have been the major contributors to the boom of stadium renovations and construction in the last 10-15 years (Hunt, 2011). Owners have been attempting to maximize these profits because as unshared revenues, they will drastically increase their franchises’ bottom line. Owners can also take advantage of creative accounting practices by using the commitment to building a new stadium as a front to gain emotional support from the public in order to receive public funding for the project. The downside of this practice is that when public funding is the major contributor of building a new stadium, it could be the case where the majority of taxpayers are priced out of buying tickets to the games. This can become a dangerous situation because the team could then threaten to move to a different city, one that would support the building of a new stadium, if they don’t have the public support of the one they are currently in.

What Happens After the Stadium is Built?

After the completion of the construction of a new stadium that has been aided by public funding, how do NFL owners maintain the financial support from the public and local governments? It is a reasonable question that owners have been able to creatively navigate around in an accounting sense. This can be answered in the form of a major tax break that can be taken advantage of. If a corporation in the community of the NFL team buys tickets to a game, concessions, or a luxury suite, and then uses these commodities on current or potential clients, it is subject to write off half of the cost as a business expense (Eitzen, 2000). This can result in local taxpayers covering some of the cost of business prospects of attending the team’s games. This gives the local businesses the incentive to continue to offer this to their clients because of the write-off that is allowed on their tax return. As a result, this maintains the revenue flow that is generated from ticket and luxury box sales. Keeping this in mind, the issue of what revenues they can keep and what they must share becomes relevant to the discussion.

What Constitutes “Shared Revenue?”

Under the current CBA and revenue sharing model, only three revenue categories are shared with the rest of the league. These are ticket sales (with 40% going to the visiting team), TV revenue, and NFL entity revenue (Hunt, 2011). Surprisingly, merchandise sales are not included in shared revenue, along with concession sales, parking income, local sponsorship and advertising, and a few other categories. This provides owners with a massive opportunity. This is how an NFL franchise generates its controllable revenue. The unshared revenue streams just mentioned are subject to business decisions that the owner can make that may or may not positively affect the bottom line. Unshared revenue streams are definitely a component of the CBA that has a positive impact on owners, because they have the freedom to control revenue without limitations and sharing with the other teams in the league. However, the NFL has created a system that has tried to combat the advantage that larger market teams have as a result of these unshared revenue streams.

How the NFL Combats Unshared Revenue – The Salary Cap

With all of the freedom owners have in manipulating merchandise and ticket sales, there is one constant factor that must be present in order for these revenue streams to continue to flow: winning. Without a winning team, it becomes much more difficult for these revenues to be generated. The key to having a winning team is to obviously have good players. The creation of the NFL salary cap is how the league maintains a competitive balance amongst its teams and controls the money flow and limits the freedom of the owners. The salary cap is a hard cap on the amount of money a team can spend on signing, drafting, and trading players. NFL teams are incentivized by maximizing their talent while not breaking the cap in order to maximize their unshared revenue streams. In this sense, owners must carefully plan for and account for players’ base salaries and signing bonuses. Both of these figures are included in calculating the expenses that are subject to the salary cap.

Conclusion

The NFL owners and the Player’s Association are constantly in negotiations to modify the CBA to try to get the biggest advantage possible for their respective side. It is a constant struggle for power and money that will never go away because of the nationwide support for the NFL. The NFL franchise owners will always face challenges governed by the league itself that must take creative accounting practices to maximize profits.

REFERENCES

Hunt, J. R. (2011). To Share Or Not To Share: Revenue Sharing Structures In
Professional Sports. Athens, Ohio, United States of America.

Eitzen, D. S. (2000, March). Public Teams, Private Profits: How Pro Sports
Teams Run Up the Score on Fans and Taxpayers. Dollars & Sense: Real
World Economics
.

Jessop, Alicia. "Jerry Jones' 1995 Risk Allows The Dallas Cowboys To Become Leaders In The Growing Women's Sports Apparel Market." Forbes. N.p., 29 Nov. 2013. Web. 15 Nov. 2015.