The Funding Rule Dilemma

The topic of guaranteed contracts, ignited by the 5-year, $230M full guaranteed deal the Browns extended to quarterback Deshaun Watson, has been kicked around by players, former players, the NFLPA, league owners and of course the media ad nauseum ever since. The discussions have also included banter over a seemingly archaic rule implemented by the owners somewhere this side of the leather helmet years, known as the funding rule.

The funding rule, initially intended to provide security and peace-of-mind to players, requires teams to place a portion of guaranteed contracts into an escrow account managed by a third party, at the time a new contract is agreed upon. The amount that teams place into escrow takes into consideration the fully guaranteed amount of the contract, less the first year payout to the players. The balance is then placed into escrow, the exact amount being the present value of the remaining guaranteed dollars.

So for example, let’s say that a player signs a 5-year, $250M contract that includes $200M fully guaranteed. And let’s assume that the signing bonus is $60M paid up front and the first year salary is $10M. The player receives $70M in year one and the present value of the remaining $130M is placed into escrow. The present value is presumably discounted by a rate commensurate with a fully guaranteed market security.

As market deals for players swell with the salary cap, along with the climbing guaranteed portions of new contracts that the NFLPA fully campaigns for, it places more and more pressure on teams to be cash flush in order to remain in compliance with the funding rule. But the funding rule has some interesting nuances.

The owners are using it as a bargaining tool to create leverage. They can say that they don’t have the wherewithal to escrow all of the guaranteed money extended to 53 players on the active roster along with any financial assurances made to injured players and/or practice squad players. And therefore, owners will use the funding rule as a crutch to gain an edge in negotiations as it relates to guarantees.

Interestingly enough, the funding rule is NOT part of the collective bargaining agreement. It is a rule that was put in place by the owners and can be abolished at any time by the owners. But will they? The guess here is that the owners will keep it around and use it as a negotiating chip when the new collective bargaining agreement is discussed. The current CBA expires in March of 2030, so there’s a ways to go.

But as the cap expands and as players’ salaries climb, and as the guaranteed portion of contracts accelerates, there will come a tipping point. That tipping point will be determined by the financial wherewithal of the owners who come in various shapes and sizes. The Bengals Mike Brown will never be mistaken for the Cowboys’ Jerry Jones. The Chargers’ Dean Spanos will not be confused with the Rams’ Stan Kroenke. In other words, if Brown can’t keep pace with Kroenke’s checkbook and continually stroke checks to be deposited into escrow, it could give the real estate mogul an advantage when negotiating.

For example, let’s say that Ja’Marr Chase wants a big portion of his contract fully guaranteed but on the heels of other big commitments to both Joe Burrow and Tee Higgins, Mike Brown isn’t capable of stroking another large check to be placed in escrow. Jerry Jones sees the weakness, buzzes overhead like a hungry vulture and disrupts the chances of the Bengals retaining Chase by offering a 100% guaranteed deal.

Suddenly the lines of the salary cap, the guiding hand of economic balance in the NFL, become blurred. The landscape of the NFL begins to look more like the survival of the fittest topography that defines Major League Baseball.

Perhaps a Larry Bird Rule for the NFL might help – something that gives teams the ability to retain their most sought after players by providing special treatment for extenuating circumstances. Eventually, that tipping point will arrive and something will give. But you can count on one thing that won’t – the owners. They won’t give in and relinquish a bargaining chip like the funding rule that can help them down the road. Even as far down the road as 2030 and the next CBA.

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