Posted by John Vrooman on Thursday, October 16, 2014 in National Football League.

Interview with New York Times Magazine.

** First, I’d definitely want to know your take on the concussions and as they relate to the tax exempt status.

In the not so favorable light of the recent series of public relations blunders the non-profit tax exempt status of the NFL has once again been called into question by politicians and pundits posturing for public approval. First it is important to acknowledge what we have been told by the League that it is only the League Office  that is tax exempt and that the32 NFL Clubs pay their fair share of taxes as for profit LLCs. The League Office is of course the agent for the 32 teams who pay about $10 million each in membership fees to fund the Office, and it is a separate entity from NFL Ventures which oversees NFL Properties and NFL Enterprises where the NFL Network is hidden away. The League Office is of course where Commissioner Roger Goodell and a handful of other high paid execs hang out. Goodell was paid a salary of  $3.5 million last year with a hefty bonuses sufficient to bring his total compensation to $44,183,000 but this is also where EVP of Media Steve Bornstein pulled down $26,144,000 included his paltry salary of $2.56 million.

I recently reviewed the 990 tax returns for the League Office and found that it is basically a clearing house for the redistribution of TV revenues and revenue sharing payments, but it is also shell to pay these execs and serve as a Big League credit facility to loan cheap G-3 money to the individual clubs to help finance their new venues. In the scheme of things this G-3 program which began in 1999 is actually a good thing because it allows the rest of the League to help fund the private share of stadium costs (the loans are repaid by the visitors share of club seat fees which they would have been paid anyway. So the League Office is a virtual $1.2 billion bank backed by the massive TV revenues where 70% to 80% of the assets and liabilities of the League Office are loans receivables and notes payable.

But the important point ultimately to be realized in this shell game is that the League Office consistently runs a negligible if not negative profit and therefore it enjoys no real net economic advantage to being tax exempt. So why would the NFL in all of its collective wisdom put up with the public relations headache of the indignity of being tax exempt?

Here is an interview I gave USAToday and Tax Analyst trying to explain what was going down.

• Why the NFL wants it, and whether there’s a case to be made for them just giving up their tax exemption as MLB did in 2007 I have no idea why they want to preserve the tax exemption and endure the adverse public relations blow-back. The NFL is truly amazing in that they have once again managed to find an insular political point of view that unites liberals and conservatives in its opposition, and leaves the entire political spectrum scratching its head in disbelief. It now appears all G-4 has been moved to NFL Ventures LLC, and that NFL Office is simply a pass through conduit for revenue sharing and distribution of national income including the mega TV deal of $160 million per club not including DirecTV and NFL Network ($44 million per club) which are located under the NFL Ventures umbrella.   The successful G-3 program loans receivable and notes payable comprised a lion’s share (80 percent) of both sides of the ledger (IRS 990-2012), but the G-3 was discontinued in 2006 (see below). It almost seems that all accounting business is in effect being siphoned over to NFL Ventures and that the NFL Office will gradually atrophy in the long anyway. The NFL has already moved its loan business to Ventures in 2006 for the same reason that MLB gave up the ghost in 2007 (see below).

  2)     What, if any, impact the presence of multiple bills in Congress to revoke the league’s exempt status has, and the impact of the league’s current troubles on that pending legislation.

  Of course the NFL’s inept chaotic internal governance has created a rash of public posturing on their own behalf and on behalf of self-serving political agendas and grandstanding politicians. Revoking the NFL’s tax exempt status will be like throwing br’er rabbit in the briar patch. It even seems that the NFL is currently sacrificing valuable tax write offs for a tax exempt association that is chronically running an accounting loss. (although they did show a modest $9 million profit in 2012).  Either the league will abandon its tax-emption and hide Roger Goodell’s salary in the next owners meeting for favorable publicity or they will continue on the transition from Office to Ventures that is already well under way.

  3) Does tax exemption mean anything more or anything different to the NFL than it does to the other 501c6 sports groups like the NHL and PGA & LPGA tours that would be caught up in a bill to revoke it?

  After careful thought (and reading your article from last Thanksgiving) I fail to see any significant advantage of the tax exempt status for the NFL Office/Ventures hybrid organization now or in the future any gains or losses seem insignificant compared to the public relations disaster the League has now created. All of the major sports Leagues have lines of credit and loan facilities for their partner clubs and none of them would gain a significant tax advantage from the exemption.  The important difference of course in the NFL was the Office’s G-3 loan program and is Ventures G-4 extension and there does not appear to be any tax exempt advantage over the loan syndication advantage already legally enjoyed by the League.

  Here is my thinking on the NFL:

  1.The new G-4 stadium loan program is being funded under NFL Ventures LLC through bond issues rated AAA which gives the Big NFL Bank (BNB) the best corporate rates.

  2.The old G-3 stadium loan program was funded from 1999 to 2006 under NFL Office (an unincorporated nonprofit association) under the best corporate rates. (I have checked all of the bond issues reference in the Dead-spin leaked auditor’s report p. 15).  All NFL Office bonds were issued at the AAA bond rate on their respective dates. These are very attractive low risk market prices derived from the syndication of risks of all NFL clubs. I have said that the NFL is the perfect portfolio and that it probably diversifies risk more efficiently that the Federal Government.

  3. All this leads  to the conclusion that the G-3 and G-4 stadium funding programs (as well as for-profit NFL Ventures and non-profit NFL Office) are virtually tax neutral and that any accounting gains though tax exemption in the “Office” are lost somewhere else in the conduit pass-through process. So the NFL has no real additional advantage to the credit syndication advantage that the League has over the individual clubs.

  4. Next I am looking through another Dead-spin leaked Deloitte report on Richardson Sports Partnership and find that the Carolina Panthers did not execute a G-3 loan but they do have a line of credit of $69 million which carries an interest rate of one-month Euro dollar rate +150 bps.  The outstanding balance was borrowed at the Eurodollar rate of 1.76% on March 31, 2011.

  It now seems that the League borrowed at the A+ rate for $1.1 billion G-3 program,  A rating for $2.4 billion Football Trust and $1.5 billion Football Funding LLC and an undetermined amount for NFL Ventures G-4 program that began in 2011. The League creates a credit facility where the clubs can borrow at an even lower rate when their risk should require borrowing at a higher rate. Here is a graph and table of the AAA rates paid by the League and the LIBOR + 150 basis points paid by the clubs. Evidence from a BBB rating for the Miami Dolphins notes issued for Sun Life Stadium suggest that this loan pas through creates an interest rate spread advantage of 300 bps to 400 bps for the individual clubs.  This may be tricky, but accepted business practice but it has nothing to do with tax-exemption.

  Also of considerable interest is the interest rate inversion (long-term blue chip yields for AAA bonds  are normally higher than short term LIBOR yields) in 2006 and 2007 which precedes a recession in 2008. Inverted yield curves where 90-day Treasuries exceed  10-year bonds have predicted every recession since 1970. In this case the yield inversion would obviously reverse the clubs borrowing advantage and explain why the G-3 fund was abandoned in 2006 and then resumed as G-4 stadium fund in 2011 when the yield curve normalized. The NFL is slowly abandoning its tax exempt status for economic reasons.

Here’s a link to the economic reasons for shifting revenue and G-3 loans from the Office to G-4 loans under NFL Ventures.

NFL Credit Facility

This where the seemingly unrelated issue of the concussion settlement rapidly approaching $1 billion intersects with the tax-exempt status of the League Office. Recall that the NFL Defendants in the NFL players concussion case are actually the NFL Office and NFL Properties. If the NFL Office is running at a loss then the League will try to shift the liability and file a bogus claim against the handful of insurers of the League Office on and off since 1960. The NFL insurance claim is probably bogus because most of the office policies exempt coverage of player injuries to begin with and the real liability lies with the several and separate NFL Clubs not the League Office and their insurers.

So apparently the real reason the League Office exists is not economic at all it is simply a legal shell to protect the several and separate club owners who are hiding behind the NFL Shield to escape their liability.

In addition:

* Is the league as economically bullet proof as everyone assumes, or could the concussions, domestic abuse cases and even seemingly unrelated troubles — the issue over the Redskins team name; incidents at lower levels of football like the one in Sayersville, N.J. — leave an impression that there’s something rotten at the core of the sport and damage the league?

Here’s an interview I gave when the NFL was bumbling through the Rice mess.

1. So far, the actions sponsors have taken seem to be pretty tame and largely confined to statements or directed at individual players rather than entire teams (aside from Radisson) or the league. Do you foresee advertisers taking stronger action or actually pulling ads from game telecasts over the domestic abuse issue?

Yes the current public posturing and indignant statements against spousal and child abuse by the NFL and its sponsors will become real and contagious collective action if it is revealed that Roger Goodell and other NFL executives have engaged in obstruction and covering up misconduct on their own part on the part of players.

 The current chaos has called into question the entire governance of the League.  The US Courts (even the US Supreme Court)have generated confusion on whether the League is the firm or the League head of a collective of several and separate firms. As a result the random League discipline from player misconduct seems reactionary because the teams are meting out capricious punishment that widely fluctuates from team to team and there is no coherent or cohesive control from the League central office.

 As a result the now strangely silent ostrich like Commissioner seems clueless to inconsistent discipline at the franchise level.  The clubs have an obvious disincentive to discipline their players when faced against another club with different rules. The inconsistency is predictable at the club level but what is confusing is the inconsistency at the League level. If the current confusion is really designed obfuscation then the NFL will have lost its credibility, and the sponsors will bail and if one major sponsor bolts competition to get distance will cause the disaffection to spread.

2. Do the kind of player contract terminations/suspensions Nike, Castrol and EA have done in the Peterson and Rice cases cause significant damage to player and league image or are they largely symbolic?

No the individual player suspensions are largely symbolic and serve as evidence that NFL players are effectively powerless.

 The NFL is economically bulletproof from political scandal and misconduct from players to owners. NFL players have zero power individually and collectively. Threats of political and social scandal concerning players in the NFL can easily be deflected by owners and the League by first ignoring the problem, doing nothing and then reacting selectively and apologetically to any social blowback.  The same is true for the indignant sponsors who are self-protectively throwing their respective endorsers under the NFL bus.

 So in economic reality, NFL players are not guilty until proven guilty in the court of public opinion after which they are punished arbitrarily by an owner-elected Commissioner without recourse to arbitration. Meanwhile NFL owners remain untouched and almost untouchable, protected by the NFL Shield and their $44 million per year Commissioner,

This also relates to the structural governance problem endemic to a sports league like the NFL.  Sponsorships are present on at least three levels: the player, the Club and the League. The League is largely unaffected by the disaffection that takes place at the lower player (Nike) and Club (Radisson) levels. It is entirely possible if not common for Clubs and the League to cross sponsors. For example Budweiser may be widely viewed as the chosen beer of the NFL but Miller Lite is the chosen sponsor of the Dallas Cowboys. The maverick ambush sponsorships spread crisscross the entire League.

The League is also protected by a bullet-proof shield with the new 9-year $59 billion TV deal through 2022 and the 10-year labor deal that caps the players’ share of revenue at less than 50 percent through 2020. Under these conditions the NFL clubs will be sharing almost 75 percent of their revenues projected to top $25 billion by 2027. The NFL is a well-oiled perfectly diversified recession and bullet-proof legalized cartel.

3. Are advertisers taking a ‘wait and see’ approach and waiting to see if this scandal snowballs even more or affects actual viewing numbers before they take further action? Has there been much actual consumer pressure on sponsor to do something?

Although the ultimate economic legitimacy of any effective  boycott must be ultimately fan based, the current wait and see caution by the sponsors is probably self-imposed righteous indigence.  But there is a scenario where Radisson’s suspension of their deal with the Viking could spread the Marriott’s much larger sponsorship deal with the league. There a was an obvious impact over the weekend against cover-girl’s get you game face on campaign when a photo-shopped pic of an embitter woman went viral (attached).

4. Why were sponsors so quick to act in the Clippers case but are more hesitant now – even though this involves actual criminal wrongdoing? I know racism is a huge hot button issue, but it seems that sponsors’ decision to distance themselves should be even more clear cut in this case where there are allegations of actual bodily arm and cases before the courts, no? Is the amount of money in play just that much larger?

The Clipper’s case is somewhat different in that the scandal centered around an owner with a well-known history of covert racism, and the real underlying boycott threat during the lucrative playoffs was from the black NBA players who comprise 75% of the League compared to black owners who comprise 25% of league ownership. So in the Clippers case it was an outcast owner against the players and the quick-to-act League. This was probably the cause for the decisive if not preemptive moves in the NBA compared to the chaotic reactionary moves by the NFL at all levels.

 In the case of the NFL the League financial stakes are significantly higher than for the individual Clippers and even for the NBA.  Unfortunately, it would be a much deeper indictment of our sports culture if league sponsors and league reactions appear to be not only more about the money than justice, but also more revealing about an apparent underlying inconsistency between the pure economics of race and gender.

5. How much is the NFL worth to advertisers like Nike, Pepsi and Annheuser-Busch? Is it possible to put a figure on how much they make from NFL ads and sponsorships?

The NFL sponsors reflect more of a gentlemen’s club with the League than a customary financial contractual relationship. It is important to realize than NFL games last week were 3 of the top rated prime time shows in the US. The NFL is also the last is a dying breed of live television broadcasts. The viewer demographic is affluent and a perfect fit for the NFL sponsors. Annheuser-Busch pays about $200 million per season to the NFL about $30 million for the Super Bowl and Pepsi rights  are around $100 annually. My guess is that as an investment the payout return on these rights fees is modest break-even at the best. There is probably  a premium paid by sponsors as well as networks for broadcast rights fees just to be associated with the most powerful sports league in the world. One fourth of the tickets to the Super Bowl go to the NFL family of sponsors compared to 17.5% for the fans of each of the participating team.

 The NFL deal doesn’t include sponsorship of the league’s 32 individual teams, nor does it include rights to sell soft drinks at individual stadiums. Coke sponsors probably two-thirds of the teams and has exclusive right at their stadiums . Pepsi sponsors probably the remaining third. The same is true for the competing sponsorships for pouring rights for competing brewing companies beers.

6. Are there other companies that advertise heavily in the NFL that haven’t so far spoken out on this issue but that we should be looking at in terms of gauging how important this issue is to the big sponsors. I know that the car companies and Verizon advertise heavily in NFL telecasts, but I haven’t seen them come out with statements or take action – how significant is that?

The NFL’s current silence at the League level speaks volumes for the chaotic incompetence of their self-governance. The current silence by major sponsors perhaps speaks to their ambivalence but it would probably only take one leading sponsor to shift the weight.  The major player in the Minnesota Vikings case with Adrian Peterson was the Governor’s admonition. In the US the public  sector has a legitimate stake in the game because the State of Minnesota and the City of Minneapolis paid for 51% of the new $975 million stadium for the Vikings. In the past 20 years 26 other luxury NFL stadiums have been built for a total cost of about $9 billion and the public has been leveraged into financing almost two thirds of that amount.  It is time for the NFL to realize that heavy public subsidy also means a heavy public hand and voice in the greater ethic by which a League and its quasi-public Clubs are  run.

 Ultimately In this NFL case the governance and credibility of the entire League could be under indictment. Violence against women problem is not new to the NFL, nor is the League’s ambivalence. This unique in-our-face episode is perhaps the beginning of a deeper accountability. Commissioner Goodell is just the messenger who carries a message of the hubris and unassailable arrogance that hides behind the NFL shield that he has sworn to protect.

*  Another way of asking this is: Who is going to play football, and what parents will allow it? If the NFL becomes purely a gladiator spectacle, played by a small segment of society, like boxing — and is no longer embedded in our culture at the high school and youth levels — does it remain as valuable an entertainment product? How much of the NFL’s growth has to do with attracting women to watch games, buy merchandise, etc. — and might women not be the ones most turned off by violence and talk of “early dementia?”

There is a chink in the NFL shield and it has been revealed by the recent governance dysfunction.

Here’s another interview statement I gave on this issue:

Roger Goodell is the paid enabler for the 32 lords of the NFL realm. To give this expendable front man credit for NFL’s revenue growth would be like giving the rooster credit for dawn.

Art Modell once said that NFL owners are a bunch of fat cat Republicans who vote socialist on football. The League’s revenue growth is the result of a critical tension between two opposing forces.  New luxury venues and mega-media are the two counteractive drivers in NFL revenue revolution that began well before Roger Goodell. The NFL has naturally coevolved with the media revolution since the league-think philosophy Pete Rozelle. The venue revolution polarizes the league because venue revenue is not shared, whereas the media revolution solidifies the league because it is shared equally.  The League is a fully diversified legalized cartel money machine that runs on monopoly autopilot.

Both revenue revolutions are based upon classic monopoly cartel behavior of charging one-half as many NFL fans more than twice as much. NFL media rights have been progressively siphoned from free-to-air to cable to satellite, and new venues have progressively replaced shared gate revenue with unshared revenue from exclusive luxury suites and corporate club seats. This might be why NBA (M)maverick owner Mark Cuban predicted that the “greedy” NFL would implode within 10 years, while the League has predicted own revenues of $25 billion by 2027.

* The NFL has talked of growing its revenues — doubling or tripling them in the coming decades — but could it be possible it’s hit its high point and we just don’t recognize that, and won’t until it begins to fall?

The NFL is now over a $10 billion league and they have projected their own revenues of $25 billion by 2027, but this is only a 5 percent compound rate. The key to the NFL growth is their imposing monopoly cartel power over the TV networks and cable on the national level (because of Congressional antitrust exemption in Sports Broadcasting Act of 1961) and their own faithful football fans on the local level. When combined with an unrelenting monopsony (one buyer) over the players (who now receive less than half of the revenues) the NFL is a natural born sure thing.

The real weakness that I and most financial analysts see is the unsustainable franchise values of 4x to 5x revenues. The Buffalo Bills just went for $1.4 billion which is about 4.8x expected revenues of $300 million largely because the cash flow is almost risk free money, but also because the league creates artificial scarcity by limiting the number of franchises to 32 when there are probably 40 or so markets that could generate positive profits.

* Do you see any damage now in terms of  sponsors leaving or lower TV ratings? (I don’t.)

The NFL is not yet the Evil Empire but it is fast becoming made for TV, studio football. The League prides itself with the message that “On any given Sunday any NFL team can defeat any other,” and that may be true. Competition among teams has become almost random  and team chemistry and synergy is non-existent, but doesn’t seem to matter to the TV fan-base. Over a third of NFL fans are also fantasy football fans whose TV enjoyment has nothing to do with team production, it is all about individual production for fantasy team players from several teams. Over 40 percent of NFL fans are women and while we were all lessened when we saw Ray Rice punch out his then girlfriend in an elevator there were still Baltimore women wearing Ray Rice jerseys almost in self-destructive defiance or maybe denial of the cold truth of spousal abuse.

Recent game attendance in the NFL has been the lowest since the League expanded to 32 teams in 2002. Gate revenues have declined from 30 percent of revenues at the beginning of the stadium revolution 20 years ago to less than 20 percent today. Marginal fans are being excluded by the thousands and being driven to the tube or digital media. In 2000 more than half of NFL fans would rather be at the game than watching it on TV and now that percentage has been cut in half. The NFL is trying to cosmetically counter the game attendance collapse by renovating new venues with wi-fi, but still it seems that those at the game and the game itself are always waiting on more and longer TV timeouts.

When left to its own devices an Evil Empire charges half as many fans twice as much and pays half as many players half as much as they produce. Venues are increasingly smaller and luxuriously more expensive; media are increasingly siphoned from free-to-air to cable to satellite to digital; and regulated broadcasters are all losing money on exorbitant rights fees passed on to media consumers in the form of more and more expensive commercial and cable fees hidden away in bundles. Since the NFL venue revolution began in the 1995 expansion the League has leveraged if not extorted 50 percent public subsidies for over $12 billion in new exclusive venues. Ultimately the NFL has emerged as the most powerful sports league in the world but it is engaging in predictable classic monopoly/monopsony cartel take-it-or-leave-it behavior. The true crime is that the NFL has itself become an out-of-control  school-yard bully and nobody really does anything about it, including the 32 owners now hiding behind the NFL shield.

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