Football and the Time Value of Money

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As the Steelers prepare for another football season with the opening of their 2019 pre-season camp, much of the drama of the recent past appears to be over, and the team’s focus can return to moving the ball downfield.

Interestingly, the 2019 season will begin without two of the team’s biggest offensive stars from the prior year. While the circumstances surrounding the departures of both Antonio Brown and Le’Veon Bell are unfortunate, the latter is even harder to swallow as the key issues appear to have been monetary-based, and the deal offered by the Steelers is said to have been more lucrative than the one he accepted with the New York Jets.

In the course of the dispute, which included sitting out the entire 2018 season, Bell turned down the Steelers’ 5-year offer, July of 2018, of $70,000,000, of which $45,000,000 represented guaranteed dollars.  In addition, Bell also refused to sign a franchise tag worth $14,500,000 that would have let him play in Pittsburgh for the 2018-2019 season.

In negotiations with New York, Bell and the Jets agreed on a $52,500,000, 4-year deal with $26,000,000 in guaranteed money. Guaranteed money is important, especially in football, and essentially means that, even if the player gets hurt, underperforms, etc., he will receive that part of the contract designated as guaranteed.

Much has been made of this contract on the local and national sports shows. On the surface, it appears as though Bell took a much worse deal than that offered by the Steelers in going to the Jets. However, it is important to remember that many factors played into his ultimate decision. Therefore, a careful assessment of the contract terms might prove interesting and shed some light on the true economics of the two contracts using the time value of money concepts.

Before discussing both contracts in depth, it is important to understand the concept that is the time value of money. According to Investopdia, “the time value of money (TVM) is an economic concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity and its diminishment of purchasing power due to inflation. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.” Further, in an economic environment with rising prices, the use of a sum money in the future will buy less than it would at current-day prices.

With respect to a personal services contract like those noted above, this simply means that deals providing more guaranteed money at the beginning of the contract are essentially worth more than contracts that include deferred money, where funds are received in the future.

From an analytical perspective, we will begin by looking at the terms of the proposed contract offered by the Steelers. Under the terms of that offer, there were actually two options Bell could have taken: the $14,500,000 franchise tag for one season or the 5-year contract extension. If Bell would have signed his franchise tag, he would have received $14,500,000 for playing in 2018.

Before turning down the franchise tag prior to the 2018 season, Bell had the chance to sign a contract worth $70,000,000, with $45,000,000 of the money being paid in the first three years. This is a crucial consideration because, as the time value of money concept illustrates, monies earned today are more valuable than the same sums earned later. Given that basic premise, the present value of a contract would be higher if more money was made available to the service provider at the front of the contract, versus the contract being paid in equal sums each year or being paid via higher amounts at a later stage in the contract.

According to Ian Rapport of NFL Network, the Steelers offered Bell the following terms:

 Year           Amount ($)    
2018         $20,500,000
2019         $12,500,000
2020         $12,000,000
2021         $12,500,000
2022         $12,500,000
Total         $70,000,000

The numbers in bold represent the guaranteed money that the Steelers offered Bell. Using a discount rate of 2% to match the current expected inflation rate, the net present value of the $70,000,000 contract at the time was $66,290,219.94. This means that $70,000,000 paid out through 2022 is actually worth $66,290,219.94 in today’s dollars, considering a 2% growth for inflation.

As an alternative illustration, the following chart compares the net present value (NPV) of the deal had the total amounts offered were spread evenly through the 5-year contract term, versus the actual offer, which was frontloaded with the guaranteed money.

Actual Contract Equal Payments
Year Amount ($) Amount ($)
2018 $20,500,000 $14,000,000
2019 $12,500,000 $14,000,000
2020 $12,000,000 $14,000,000
2021 $12,500,000 $14,000,000
2022 $12,500,000 $14,000,000
Total $70,000,000 $70,000,000
Total NPV $66,290,219.94 $65,988,433.12

As you can see, because of the structure of the contract, the offer from the Steelers was actually worth more than if the money been equally divided by the number of years.

An important intangible benefit of the Steelers’ contract offer is that 64% of the total would have been paid, regardless.  It is important to consider the short careers of NFL players and the physical stress and punishment on one’s body generated by a single season in professional football. Thus, the push for more guaranteed dollars in any contract. One need only to look at the unfortunate circumstances surrounding Ryan Shazier’s terrible injury to fully appreciate why the players are so adamant about guaranteed dollars in their contracts.

As for the Jets’ contract signed by Bell, CBS Sports reports that he will earn the following amounts  over the next four years in New York:

 Year           Amount ($)    
2019         $14,500,000
2020         $13,500,000*
2021         $12,500,000
2022         $12,500,000
Total         $52,500,000

* Only $12,500,000 of the money due in 2020 is guaranteed

The contract comes with $27,000,000 in guaranteed money. Keeping the discount rate the same at 2%, the NPV of the deal totals to $50,646,287.89. This means that $52,500,000 earned over the next four years, and compounded at 2%, is actually worth $50,646,287.89 in today’s dollars.

The contract offered by the Steelers included a fifth year as it was offered prior to the 2018 season. That amount of money offered in 2018, was $20,500,000, and was guaranteed. Subtracting this first-year payment (for comparison purposes only) the total amount incorporated in the proposed Steelers’ contract was $49,500,000, compared to $53,000,000 in the 4-year deal offered and agreed with the Jets.

These four years are compared below:

 

 

 

 

As the Jets’ deal pays higher dollars for the first two years of the contract, $2,000,000 in 2019 and $1,500,000 in 2020, the present value of the Jets’ contract offered for these four years is actually greater than that offered by the Steelers. However, such an analysis is flawed, as Bell lost the entire $20,500,000 offered by the Steelers for the 2018 season. At a minimum, by refusing to sign the franchise tag and take the franchise compensation at $14,500,000, he passed on $6,000,000 (the difference of the two numbers.)  Add these amounts to the contract signed with Jets, and the numbers are not close.

From the perspective of guaranteed dollars, the Jets’ contract to which Bell agreed was 51% of total contract dollars, ($27,000,000/$53,000,000) as opposed to the Steelers’ offer, which provide for 64% of the contract money to be guaranteed.

Unfortunately, it appears obvious that Bell made a mistake, at least from a financial perspective, by going to the Jets. Not only did he pass up what was ultimately more total dollars in the end, but he also permanently lost the money he would have been paid under the 2018 franchise tag when he chose sit out the entire season.

Given the financial resources professional athletes have available for counsel and representation, it is difficult to understand the negotiating process in this particular instance and how Mr. Bell’s representatives did not come to understand the present value impact applicable to both deals. Interestingly, the discussion emphasizes the time value of money concept but does not include consideration of compounding, as the greater amounts of money that might have been available to Mr. Bell had he  signed the Steelers’ offer, or at least taken the franchise tag money, would have led to greater future investment income which is now gone forever.

No one disputes that Le’Veon Bell is a great player.  It is unfortunate, however, that he did not get paid at his real market value.