The collective bargaining agreements in the four major sports leagues are complicated documents. This paper is designed to illustrate significant aspects of each agreement and is not a definitive examination of any of the agreements described herein. Because of time constraints and the complexity of the matters being dealt with here, please rely on original documentation for authority on any subject.
 
 
 

• National Football League

 

The NFL is a salary capped league. Salary caps limit the amount a team can spend on player's salaries during a football year. The salary cap is determined by taking defined gross revenues (referred to hereinafter as "DGR") which aggregates revenues from regular season, pre-season, and post-season gate receipts, (net of admission taxes, and surcharges paid to stadium or municipal authorities which are deducted for purposes of calculating gate receipts subject to revenue sharing) including ticket revenues from luxury boxes, suites and premium seating subject to gate receipts sharing among NFL teams; and proceeds from the copyright royalty tribunal, certain pre-season broadcast revenues, other broadcast revenues for the regular season and playoff games, and any ancillary revenues derived from the above-mentioned sources. The NFL, however, does not aggregate proceeds from the assignment, sale and trade of player contracts, proceeds from the sale of any existing NFL franchise or expansion franchise, NFL dues or capital contributions, revenue sharing receipts, other income areas not related to the play of NFL players and sales of interest in real estate and other property. Excluded DGR also includes concession's revenues, parking, local and promotion income, signage, magazine , local sponsorship agreements, stadium clubs, luxury box income other than ticket sales, sales of programs and novelties, and any categories of revenues currently attributed to NFL films or NFL Properties and its subsidiaries. The value of excluded DGR revenue items is the reason the NFL may face future problems with respect to competitive balance among its teams.
 

The NFL salary cap is determined by dividing DGR less league-wide projected benefits,, by the number of teams and multiplying by a negotiated percentage, now 62%, to determine the salary cap for each team. The benefits referred to are the pension, group insurance programs, injury protection, workers' compensation, payroll, employment compensation, social security taxes, certain per diems, moving and travel expenses, post-season pay, player medical costs, and severance pay. Salary is defined as all compensation received by the player. The cap sets a level above which players cannot be signed. Contracts that exceed the cap will be disapproved by the Commissioner.
 

In addition to a salary cap, the NFL has a guaranteed league-wide salary and a minimum team salary. The guaranteed league-wide salary is 58 % of actual Defined Gross Revenues. If salaries actually paid falls under 58 %, NFL clubs will pay to the players who played during that season an amount that will bring the total up to 58 %. The minimum team salary is 50% of projected Defined Gross Revenues. Any shortfall is to be paid directly to the players by the team prior to April 15 of the next football year.
 

The NFL has a free agency system in place as well as restrictions on entering players' salaries. Players can be restricted or unrestricted free agents. Unrestricted free agents are players with five or more accrued seasons, or with four or more accrued seasons in any capped year. Such a free agent player is completely free to negotiate and sign with any other club and is an unrestricted free agent. The player may sign with another team up to July 15 and thereafter he may sign a contract with his former club, for amounts higher than his previous contract, or, any amount, if his former team has relinquished its rights to him. If the player has not signed the contract by the Tuesday following the 10^th week of the new season, however, he is barred from playing in the National Football League for the remainder of that year.
 

A restricted free agent is a player who has three or more accrued seasons. His old club has the right of first refusal and/or draft choice compensation if that player signs elsewhere. The rights of the old club are based upon the offer sheet signed by the player with his new team, and the obligation that the old club tender a qualifying offer to the player. These rights are (1) right of first refusal; (2) right of first refusal and draft selection of player's original draft round; (3) right of first refusal and one first round draft selection; (4) right of first refusal, one first round draft selection, and one third round draft selection. These club rights vest differently depending on whether or not the signed player has three years or four years NFL service. The signing period for restricted free agents is March 1 through April 23, or as agreed to by the NFL and the NFLPA.
 

The NFL has negotiated, however, very important exceptions to free agency which are found in the franchise and transition player rules. A franchise player is a single player designated as a franchise player, whose free agency rights are somewhat restricted. To exercise this right, the team must make one of two required tenders. The first is a one year contract for the average of five prior years' salary or 120% of his prior year salary, whichever is greater. The player may sign with another team, but the former team gets two first round draft choices. The second tender option is a one year contract for the average of five prior years' salary at his position at the end of the restricted free agent signing period or the amount of the first tender option, whichever is greater. A transition player is one designated by the club, so that the club retains a right of first refusal. The club is required to tender a contract for the average of the 10 largest prior year salaries at the player's position to retain transition player rights.
 

Where the NFL's labor agreement appears to be extraordinarily fair to both players and owners, the failure to include all revenues, including stadium revenues, in DGR, and the special rules of salary cap accounting give some clubs tremendous advantages over others. For example, a signing bonus is pro rated over the life of the contract. If two teams are competing for the same player and one team has enormous stadium revenues and the other team does not, the former team can offer the player a salary based upon a signing bonus, for example, $10 million and an annual salary of $2 million over a five year period. As totaled, this is a $20 million offer. Another team, with less stadium revenues or inability to gain access to the $10 million in cash necessary to pay the signing bonus, would offer a $4 million per year contract. Clearly, the club able to afford the signing bonus is in a much stronger position to sign the player because the player is absolved of the risk of injury or nonperformance. He also has a net present value advantage over the other form of contract, although, according to salary cap accounting, both contracts are equal. Salary cap accounting also deals differently with performance bonuses, based upon the likelihood of their being earned.
 

When you hear of football teams demanding new stadiums, it is because they wish to control non-DGR revenues so that they will have the ability to fund free agent and other player contracts under the salary cap. As salaries rise in the NFL due to the increase in overall revenues, the teams with large stadium revenue sources will have an added advantage that will undoubtedly equate to increased success on the gridiron. There is, therefore, a real need for the NFL to address this inequity at some time in the near future. Hopefully, this can be done internally, but as new teams with new stadiums and other new stadiums come on line, the ability to generate the votes necessary to bring such a constitutional change into being becomes less and less likely. It is, however, a real problem and one we will be dealing with in Minnesota in the very near future.
 

• National Basketball Association

 

The NBA labor agreement calls for a soft salary cap based on a percentage of basketball related income (BRI) which has several major exceptions. As you shall see, BRI is all inclusive as differentiated from the NFL's DGR. BRI consists of regular season gate receipts enhanced by the value of trade-outs and the value of the first 1.2 million complimentary tickets and tickets provided as part of sponsorships where the fees for those sponsorships has already been included in BRI. All proceeds of any kind from the broadcast or exhibition of games, either pre-season, regular season or playoff, portions of such games and non-game NBA programming, on any and all forms of radio, television, telephone, internet, and any other communications media, forms of reproduction and other technologies, whether presently existing or not, anywhere in the world, whether live or in any form of delay, including, without limitation, network, local, cable, direct broadcast satellite and any form of pay television, and all other means of distribution and exploitation, whether presently existing or not and whether now known or hereafter developed, including, without limitation, such proceeds received or to be received on an accrual basis by any entity related to an NBA team net of reasonable and customary expenses related thereto, but not including the value of any broadcast time or cablecast time provided as part of any such transaction that is used solely to promote the NBA, its teams and players and all exhibition game proceeds, playoff gate receipts of any kind, all proceeds of any kind from in-arena sales of novelties and concessions, sales of novelties in team identified stores within the 75 mile radius of the arena, parking, programs, sponsorships, arena signage, arena clubs, 40 % of fixed signage, certain luxury suites revenues, proceeds received by properties, net of expenses, premium seat licenses and all other revenues conceivably based upon basketball player activities according to a rather complicated and lengthy formula. In essence, where DGR in football relates to limited revenue streams, BRI in basketball is everything.

The NBA is a soft cap league. The NBA salary cap and collective bargaining agreement for 1998-99 is $26 million and the minimum team salary is 75 % of the salary cap. The NBA has an entry draft limited to two rounds. Selected player's salaries are subject to an entry player salary cap for the first three years.
 

The NBA attempted, in its now defunct collective bargaining agreement, to create a situation in which clubs were protected with a salary cap, had some control over entry level players' salaries, and would be granted flexibility with respect to the amount they could pay to sign their own veteran players rather than lose them in free agency. The veteran exception and $1 million exception are now major issues to the labor negotiations. Free agency, of course, is a device that benefits players only. The earlier myth that free agency enhances competitive balance has been buried long ago.
 

The mechanisms contained in the NBA bargaining agreement were thought by management to provide for some semblance of competitive balance. Of course, the NBA has absolutely no competitive balance in that some teams win 80 % of the time and others lose 80 % of the time. The NBA has long ignored the need for revenue sharing and has sought to maintain its balance through its collective bargaining activities. By re-opening their agreement, management is now seeking to implement a system that will maintain competitive balance through the labor agreement. The positions of the two bargaining units at this time, the first week of October 1998, is so far apart that negotiation is virtually impossible. Hopefully, the arbitrator's decision relating to the payment of certain player salaries during a lockout will prompt some movement on one side or the other. Among the options available to the players is a decertification. It appears that the NBA now understands that the labor agreement must control events and that the Mancala Mechanism, discussed at the end of this paper, must be restricted.
 

III. National Hockey League
 

The National Hockey League labor agreement was negotiated after a period of some duress in that industry and the effect of that duress is shown in the agreement. This is especially true of the language controlling the agreement's termination which states that it terminates on September 15, 2000, and then becomes a year-to-year contract until either side furnishes notice of termination 120 days prior to September 15 of any given year. Both parties, however, did have the right to re-open the agreement following the end of the 1997-98 season.
 

The NHL is an uncapped league. As in all major sports, entry into the National Hockey League is largely controlled by an entry draft. This draft consists of nine rounds in which both entry selections and compensatory draft selections are intermixed. Compensatory draft selections can be as high as the 11^th selection in the second round of the entry draft. There is a fairly complicated mechanism for determining the value of a lost player and this mechanism determines, of course, the compensation to be awarded to the team that loses the player. For example, the highest selection was mentioned above, the lowest selection is for a club that loses a compensation free agent who is not in the top 50% of all league players but is within the top 75%. For this player, the former club shall receive a compensatory draft selection following the 156^th selection in the entry draft. Players who are below the top 75% do not require compensation if they are signed by another club.
 

The amateur or entry draft controls rookie salaries. The entry players have a maximum compensation in 1998 of $975,000, which number increases $50,000 per year for the remaining term of the contract.
 

Free agency in the National Hockey League occurs when a player reaches age 31 as of June 30 of the year in which he becomes a free agent, has four seasons of current National Hockey League credit and whose contract has expired. There is, however, restricted free agency in the National Hockey League for players who, depending on their age at their first signing, have played one to three years in the National Hockey League. These players can be 21 years old. In this system there is a right of first refusal or draft choice compensation at the prior club's option. For the club to retain that option, however, it must tender the player no later than June 30 of the final year of the current contract a one year contract subject to salary arbitration which is at least 110% of the major league portion of his prior year's salary, or $440,000. If the player's prior salary was greater than the average league salary, a tender of 100% of the major league portion of that prior year's salary is required. Again, no right of first refusal attaches to a player who is age 26 or older. There is a salary arbitration system in the National Hockey League. It doesn't appear to be utilized as much as baseball's system. This may be because of the different procedures and the fact that clubs can actually walk away from one decision per year.
 

A review of the National Hockey League system indicates that it is probably a very workable system on paper and seems to provide ample protection for both owners and players. However, there has been an explosive rise in NHL player compensation over the last five years which is caused, obviously, by forces not present in the collective bargaining agreement but certainly related to it. I will deal with my views on that phenomena when I describe the Mancala Mechanism at the end of this lecture.
 

• Major League Baseball

 

There is no salary cap in baseball, although there is a salary tax which is being applied now, but which goes off in 1999. There is increased revenue sharing in baseball that is being phased in now and will maximize in 1999. Revenue sharing in baseball is not enough to make a bottom third team competitive with a top third team, but does keep them in the business so the top third has someone to play against. Baseball has an entry draft and no restrictions on the amount those players can be paid. There is also salary arbitration for the players with at least three years of Major League service, the top 17% of two-year players and less than six years. Salary arbitration is a mechanism that causes rapid escalation in salaries when coupled with the Mancala Mechanism that will be discussed later.

Players with six years of Major League service can file for free agency and draft pick compensation in the following amateur draft is awarded the team that loses a player. The draft pick awarded as compensation is based upon the lost player's statistical ranking in the previous year. In baseball, top third teams set salaries, middle third attempt to pay them, and bottom third avoid all they can, but, even with the worst labor agreement, it is a great game.
 

• Mancala Mechanism

 

There are five participants in the Mechanism's operation. They are the owner, general manager, player, player's agent, and union. The union's interest is served by negotiating a collective bargaining agreement that gives its members and their agents' flexibility and power in salary negotiations. Unions negotiate only the minimum terms and conditions of employment and conditions under which players can move from team to team, which adds leverage to agents' negotiations. Player's interests are represented by agents. General managers have a dual role. They represent owners, of course, but they also represent their own interests, which are often different from the owners'. The general manager and agent play Mancala with the owner's pebbles.
 

Owners are, for the most part, people with great wealth which was made in other industries where they are masters of its subtleties, nuances, tricks and turns. In sports, they are the unwitting enablers of the Mechanism, because they employ general managers whose main interest is preserving their positions by placing a winning team on the field, rink, or court.
 

The Mechanism works this way. No general manager in my memory has ever been fired because his team lost money. A general manager's greatest need is for good players and he will pay anything to sign them. Agents know this and develop relationships with general managers, who negotiate briefly with the agent with respect to the price of the player, and then become the agents' agent in negotiating that price with the owner. General managers, generally, have no concern over profitability and owners have little knowledge of the subtle system that works against them. This Mechanism works because owners rarely spend sufficient time with their sports company to understand the intricacies and subtleties of its business. Owners very seldom take time to understand the player compensation system so that they can properly evaluate payments they are making to their athletes. Owners rarely understand the criteria used for judging a baseball arbitration case, the statistical basis for linebacker compensation, or work through very complicated NBA and NHL labor agreements to determine the proper amount to pay players. Because of this, they are dependent on their general managers, thus enabling this Mechanism to work.
 

The Mancala Mechanism applies to all sports. There are, however, general managers who attempt to manage salaries carefully. Also, some owners are now setting firm budget limits for player salaries. However, the Mechanism's operation with the great majority of teams results in an impossible scenario for these dedicated executives and responsible owners. All player contracts are based upon comparable worth analysis and the operating Mechanism causes comparables to rise, hence, raising salaries for all.
 

After pointing out the existence of this Mechanism in sports contract negotiations, it is necessary to suggest a solution to the problem, assuming, of course, that a solution is necessary. If losses can be added to franchise prices, debt can be added without restraint, and media, licensing and ticket revenue rise at rates faster than salaries, such a solution may not be thought necessary. It appears that salary increases are outstripping revenue and that the debt carried by sports teams is now oppressive. The poor financial condition of teams is having an adverse effect on competitive balance and a solution is necessary.
 

Competitive balance is the single sustaining factor that maintains league and team values. In determining the source of value of professional sports teams and leagues, it is necessary to look at the basic structure of the league and define the league's product. The basic unit of value is the game. To begin with, no team can produce a game, therefore, without the other members of its league, or at least other teams, no team has any value of and for itself because it alone cannot produce the product. Admittedly, there is potential value because of geographical market, but it still cannot produce a game without another team. The value of each game is based on the fact that the game created is totally unique, is played according to well understood rules, by players of the highest quality, who are distributed fairly equally between the two participating teams, therefore, placing the outcome of the game in doubt. Alter any of these factors and franchise values diminish. League rules are designed to create and maintain competitive balance to preserve team value. The growth of salaries is now placing that balance in jeopardy.
 

Competitive balance is the factor that drives broadcast, license and ticket revenues. Its decline must be dealt with quickly. The solution to the operation of the Mancala Mechanism, the explosive rise in player compensation, and its deleterious effect on competitive balance is in the hands of team owners. Owners now must pay very close attention to their league's labor policies and practices. This is more than just a passing review of a collective bargaining agreement or a misguided desire to "make a deal" during negotiations. Owners must have a close examination and understanding of that agreement and its long term impact.
 

As long as the Mechanism is functioning, collective bargaining agreements must be perfect or League rules must exist that maintain competitive balance through manipulation of under control limits, internal draft procedures, or other mechanisms. Until this situation can be achieved, owners need to pay careful attention to individual salary negotiations.
 

The owner's role in individual player contract negotiations is to make sure that the general manager explains in detail the basis for salary and indicates all alternative actions available at the time. Very often, there are players available that can replace the target player at a far lower salary. A careful examination of players' skill levels in all sports would indicate that they are largely fungible within four groups, made up of the top 10%, with the remaining 90% divided into three equal groups. An owner must understand, therefore, how league rules, collective bargaining agreements and his own general manager's preferences often act to create a false value for individual players. This understanding of available options and the methods by which contract value is assigned to a player is team management's most important responsibility.
 

The sports industry is developing very sophisticated financial devices, including the construction of new facilities, in order to fund the growth of player compensation. Many of these devices, however, simply take future revenue streams and convert them to useable cash. The future problems created by this sort of financial engineering is obvious, unless the underlying cause, explosive growth in player salaries, is brought under control. Team owners complain about losses and rising salaries. They, however, are the enablers of the Mechanism that drives salaries and they must take over if the problem is to be solved.