Colts could struggle with $9 billion NFL debt: Revenue hikes by big teams could skew salary cap

Keywords Sports Business

Small-market teams like the Indianapolis Colts could find themselves straining under the pressure of the National Football League’s recently disclosed $9 billion debt, which is three times higher than Major League Baseball’s and estimated to be double that of the National Basketball Association.

Made public last month as part of a court filing, the NFL’s debt encompasses all league and team obligations. Sources close to the league said it is tied closely to stadium building projects.

The Colts, for example, are contributing $52 million toward construction of Lucas Oil Stadium. Team officials have to cover that debt while contending with an everescalating player payroll as new stadiums in larger markets push the salary cap skyhigh. The cap is based on the average revenue of the league’s 32 teams, and new stadiums are built to generate more money-which will skew the average, sports business experts said.

The league’s ample cash flow should help deal with the debt, sports business experts said. League revenues were $7 billion in 2006.

Still, the league’s debt as it relates to team revenue and the salary cap was a hot issue at the NFL owners’ meeting in Palm Beach, Fla., earlier this month.

Colts owner Jim Irsay pledged $100 million toward Lucas Oil Stadium. The Colts received $48 million from the city as compensation for terminating the team’s RCA Dome lease, but are still on the hook for $52 million. Although Irsay isn’t concerned about the team’s ability to pay its own debt, remaining profitable while still maintaining a Super Bowl-caliber team, he said, may be another matter.

“The Colts are on strong footing, but it’s a challenge to field the type of team we have while being a low-quartile-revenue team,” Irsay said. “It takes a commitment to the brand and quality of the team.”

There’s a bigger concern for the Colts than the team’s own debt, said Marc Ganis, president of Chicago-based Sportcorp Ltd., which counts several NFL teams as clients.

“When the large-market teams push to cover their debt, that will have a major impact on all teams,” Ganis said.

A major chunk of the debt comes from stadium projects for the Dallas Cowboys and New York Giants and Jets.

“If I were in Indianapolis, I’d be worried about New York and Dallas skewing the average team revenue and putting upward pressure on the league salary cap,” said Victor Matheson, a sports economics expert at College of the Holy Cross in Worchester, Mass.

The Colts, which had 2006 revenue of $184 million, according to Forbes magazine, already trail large-market teams in Dallas and Washington, D.C., by $100 million. Further revenue gains by teams like the Cowboys would put added pressure on smaller markets that don’t have the population base to drive massive revenue increases even with a new stadium.

The salary cap rose from $109 million last year to $116 million in 2008, and is already set to increase at least 6 percent in 2009. In addition to payroll, Ganis said, NFL teams have travel expenses, administrative payroll and expenses, and other operations costs.

On the upside, Lucas Oil Stadium-with more suites, club seats and other revenue-generating amenities than the RCA Dome-should boost the team’s annual revenue 10 percent to 20 percent, sports business experts projected. The new stadium is set to open this fall.

The new stadium projects around the league, Ganis said, could push player payrolls up 10 percent annually in years to come if the revenue-sharing formula isn’t tweaked or the collective-bargaining agreement with players isn’t adjusted.

Any manipulation of the collectivebargaining agreement could lead to a strike or lockout in 2011 after the current deal runs out, Ganis said.

The league’s debt has become a contentious issue with the NFL Players Association, which filed a collusion complaint against team owners in February over the league’s debt-reduction plan, which caps teams’ debt. The players’ union says that restricts athletes’ pay by limiting teams’ ability to invest in new revenue generators.

If the owners opt out of the current collective-bargaining agreement as expected, the deal will expire after 2010, which would be a season without a salary cap.

The players’ union is arguing that NFL owners are colluding to restrict player pay by capping team debt levels.

“The player payroll is already $14 million more than it was two years ago,” Ganis said. “That’s a dramatic increase, so at some point, you wonder how much some teams can take and still keep pace.”

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