With free agency set to begin, all eyes are on the amount of free salary cap space each of the 32 teams in the NFL currently has. According to Over the Cap, only four teams enter the offseason with more money to spend than the Jets.
There is another critical component of free agency that flies under the radar. That is the amount of cash each team has on hand.
At the risk of oversimplifying things, NFL contracts have two sorts of payments, guaranteed and non-guaranteed. They work exactly how you would
imagine. Guaranteed money is money the team commit to pay no matter what. Non-guaranteed money will be paid only under certain conditions. Most non-guaranteed money is simply salary the player collects if he remains on the roster.
Guaranteed money comes with a catch. When an NFL team signs a player, it must place all guaranteed money (minus a deductible) into an escrow account until it is paid.
This rule is a relic of the past. In the first several decades of its existence, the NFL was not a stable league. Teams depended mostly on ticket sales to fund operations. As you probably know, ticket sales can be fickle. A bad year, bad economic conditions, and any number of other factors can lead to a steep decline. And when your ability to stay in business is based on selling tickets, it means trouble.
The early days of the NFL saw franchises constantly moving and/or folding. The escrow rule was meant to protect the players. All of the money they were owed was in an escrow account so the players would be paid even if the team they played for went under.
The NFL’s business model eventually transitioned into one driven by the sale of media rights, particularly the TV rights. This combined with expansive revenue sharing has provided the league with stability. No team has folded since the league’s first national television contract with CBS in 1962. The value of the TV deals has risen exponentially through the years. Teams now have big TV revenues coming in every year, and that money is stable.
There is no longer any doubt that teams will be able to pay out any contract given to a player. Even in the unlikely event a team was mismanaged to the point of insolvency, it is a guarantee multiple billionaires would line up to buy it and restore financial viability.
Still the escrow rule exists.
Over time the rule has been mildly weakened. Teams can now subtract $15 million on each contract from the amount they need to put in escrow on each deal. Still, the bulk of guaranteed money needs to go into an account when a deal is signed.
All NFL owners are very wealthy, but that doesn’t necessarily mean that they have hundreds of millions of dollars in cash laying around. The owners have money tied up in investments. For some owners, their wealth is based mainly on their ownership of an NFL team.
The escrow rule gives the very wealthiest owners a clear advantage in free agency. They are more likely to have extra cash at their disposal.
For owners who don’t have many other businesses beyond their team, things are a bit more challenging. Over the years there have been offseasons with rumblings about the Jets not having enough cash to make a big move. These have tended to come immediately following stretches where the Jets made a number of splashy and expensive additions. I can’t speak to the validity of these rumors, but the escrow rule would go a long way towards explaining these dynamics if true. If you give out a lot of guaranteed money one offseason, the cash goes into escrow. There might be less cash for big money contracts the next year (which also would need to go into escrow) even if you have a decent amount of salary cap space.
Why doesn’t the NFL get rid of this outdated rule? Nobody can say for sure. There is some speculation that the owners like the rule as a convenient excuse to not fully guarantee contracts. The rule certainly doesn’t seem necessarily, though. These days NFL teams can confidently project future revenue in a way that wasn’t possible decades ago.
In any event, this rule shows how important the business department is for each team. A big but underrated managing a team effectively means making sure you have immediate access to a sufficient amount of cash as free agency begins.
