• What the Referees are Actually Bargaining About.

    I am writing this article for me. I like laying out this level of detail. I learn a lot looking up facts to write it and from response from you. If you think I got something wrong, please say so and we can both go GOOGLE up the truth. I am going to be making many simplifying assumptions. If I do some that you believe unreasonable speak up, and I can tell you why I think it is reasonable, and you can counter.

    This negotiation is all about Pensions, but in a way that many don't think about at first blush.

    What is a pension? Simply, it is where, as part of an employees compensation, his employer guarantees an income, usually a percentage of his final salary, after a fixed age, usually 65, upon his retirement from the company. There is usually a vesting period, i.e. a minimum length of employment for an employee to get the pension. For people retiring with less tenure, or leaving the firm, usually a pro-rated percentage of the pension is paid starting at 65.


    I don't know the details of the NFLRA pension. Let's make some assumptions:

    20 year vesting period.
    Linear vest (i.e. if you stay 10 years you get half your pension)
    65 payout age
    70% of salary as Full Pension

    Are these reasonable? I think so. Some pensions have a vesting period of longer, but NFL referee isn't an entry level job. You usually start after you have reffed at other levels, usually more than 1. Ed Hoculi entered the NFL as a ref at age 40. Plus there are physical requirements on being a ref that may preclude doing it until 65. So I think 20 is a reasonable period.

    The other numbers are what I believe to be typical of pensions.

    So a pension is a Promise to pay a certain amount after age 65 to a person for the rest of his life.

    To insure that companies keep their promises, there is a lot of Federal Law in this area and the corporation has to pay into a Pension Fund under set rules designed to allow there to be enough money to pay the employee for the duration of his life after retirement age.

    If the employee dies, typically the pension stops. And typically if he lives, it keeps going. It doesn't depend on the amount the Corporation contributed or the returns realized by investing the pension fund. If the pension fund invest profitably, the Corporation will have to pay less in the future. If investing is down, then the Corporate contribution will grow to meet the difference.

    As we do our math, let's make some other simplifying assumptions:

    Let's put inflation at zero forever. It isn't, but it shouldn't warp the results too bad. Most pensions have Cost of Living adjustments. Zero inflation lets us ignore those.

    I also believe, but do not know, that the NFLRA pension was started sometime in the 2001-2002 season, with the prior CBA. Let us make the simplifying assumption that the pension is simply 10 season old, i.e. it started with the 2002 season.

    Let's consider the average ref. The NFL wants to convert Mr Average's pension (and those of his 118 peers) to a simple investment fund, where the NFL will pay a fixed amount each year.

    Let us make another simplifying (and wrong) assumption. Let's say the NFL's bargaining position is simply go to a “fixed contribution retirement fund” from the current “fixed benefit retirement fund” (pension). No salary change. Nothing else. We won't worry about the other differences, we will just focus on the pension.

    And let's say the NFLRA just wants to keep the existing salary and pension.

    How far are apart are those two postions?
    The average NFL Ref has 10 years of tenure.
    He makes an average of $148,000 per year.

    So he is 50% vested in his NFLRA pension. i.e. if he left the NFL at the end of last season, he would, at age 65, receive 70% x 50% x $148K for the rest of his life. Or $51,800 per year. Call if $52K.

    Now let's get actuarial. Our average guy has been in the NFL for 10 years. Using the Hoculi Entry Age of 40, that means that Mr Average is 50 years old.

    Mr. Average:
    50 years old
    NFL Ref for 10 years
    50% vested in Pension

    In the NFL's proposal they want to change over from a pension, to a fixed contribution plan.

    To do that the NFL has to nail down two things:

    1) What will the NFL's yearly contribution be?
    2) How will we convert the existing years built into the pension, into a fixed contribution plan?

    Let's take the second one first. I don't know what the NFL's offer is, but I will wager dollars to donuts (chocolate icing with nuts) that the NFL will want to simply take the existing amount in the Pension Fund and prorate it into a dollar amount for each ref and place that in an retirement fund. And THERE is the problem.

    How much money is in the pension fund? Mr Average's portion of the entire fund is simply the amount that would be there if he were the only person in the pension. Most pension funds have used an 8% return as an estimate for figuring pension contributions.

    To fund a pension for 20 years which earns enough at 8% return to pay an employee 70% of the Referree Max Salary ($200,000) starting at age 65, to his death at age 79 (we are using actuarial norms here) would be $17,500 a year for an employee who was hired at age 40. And that's probably what the NFL was paying back at the start of this pension.

    Sadly, the investment performance hasn't been at 8% average per year. No one's has. There is a federally mandated Pension Manager who figures out what must be paid each year. From news reports we know that in 2011, the NFLRA pension manager made the NFL pay $47,500 on average, which is what it would take if the return was 3.5%.

    So let's build a model of what happened. The NFL contributed $17,500 for the first 8 years and then $47,500 in 2010 and 11. And the return was 8% until 2008, with 3.5% in 09 thru 11.

    So what does Mr Average's pension fund have in it?


    So Roger wants to close Mr. Averages Pension and give him a eTrade account with $289K and forget about the Pension Promise.

    But Mr. Average is no dope.

    Now let's get actuarial. Our average guy has been in the NFL for 10 years. Using the Hoculi Entry Age of 40, that means that Mr Average is 50 years old.

    The average US male of 50 years has a life expectency of 79. BUT these guys both run around on their job, train to do so, are picked for athleticism and are high income. So let's bump them a bit.... how about to 83? That is 28 years of $51,800 to Mr Average. Or $1,450,400.

    Again simplifying by forgetting about the Time Value of Money (ask Cris about it, he took Accounting at Florida), we get that, as part of his compensation, Mr Average has a promise from the NFL for $1,450,000.

    So to come back to work, Roger would like Mr. Average to exchange a promise worth $1,450,000, which Mr. Average already has, for an eTrade account worth $288,534.19.

    Now can you see the problem?

    Would you pay over a million dollars out of your net worth to come back to work?

    And look what Mr Average can expect if he comes back to work.

    He expected to work 10 more years and get his final salary up to the max of $200,000 putting his pension income at $140K per year for his 28 years of pension or $3,920,000. Instead he will be getting a fixed contribution which the NFL has offered (different news accounts give this as $27K to $12K, let's give the NFL a break and say $27K) of $27K for 10 years. Woot.

    So Let's Recap the NFL's offer

    1) Decrease your existing net worth by over $1M to return.
    2) Substitute an increase of $2.5M in you net worth for 10 installments of $27K in your eTrade account.
    3) Same Salary as always.

    Do you see the scope of the gap?

    Even if my assumptions are off, the gap is still HUGE and not only having to give up future money, but the minute the NFLRA signs a CBA that kills the pension obligation, Mr Average will have wiped out $1M of his retirement nest egg, plus went backwards from his prior CBA by another $2M of nest egg growth.

    The average referee would be better off retiring now than coming back to work for another 7 years of the NFL plan. And someone with MORE than 10 years would be better off retiring now, period. And if the referee can live past 83, it's worse. And they just might.

    Of course this gap is even BIGGER if NFLRA had some Retiree Medical Benefits. Then the gap goes to the moon.

    Of course, this is all because the NFLRA got a sweeheart deal in 2001. A pension on a part-time job with a max salary of $200K? Ludicrous. Just another reason why Tags won't go into the HOF. But Mr. Average already has 50% of his pension in his Mental Piggybank. And Mr. Average with his 10 years in the Pension wants the Promise, not Roger's piddly cash, because the Promise is worth soo much more.

    As you think about the negotiations... Think would YOU pay 7 years wages out of YOUR bank account to come back to work after they locked you out of a part time job?

    If you see radical errors, please let me know.

    Comments 21 Comments
    1. DaBearsFan's Avatar
      EDIT: Misread it. Should really not comment at 1am. I'll check again tomorrow but the basics seem okay.
    1. thigg4's Avatar
      so you are saying there are 120 refs, and, they'll start collecting their $50,000 per year, over the next 15 years? If so, I think you are saying that the NFL would add $6 million dollars to the payroll over the next 15 years (or $400,000 per year). If that's about right, I think the NFL can afford it.
    1. edave's Avatar
      Lots to think about on my drive up the coast tomorrow.

      Why might the costs have such a huge jump if the refs are covered under the same plan being used by the veterans?
    1. ScottDCP's Avatar
      The only thing I see, and I will try to run this by my personal financial consultant/wife if she can manage the patience for something related to football, is in the recap:

      1) Decrease your existing net worth by over $1M per year to return.
      Is that supposed to read per year? Up to that point I was assuming it to be per person.
    1. ScottDCP's Avatar

      In a separate thread you indicated it might take some grandfathering to get the refs to accept new pension deal. Do you think you could get it at a reduced rate, or does it look like, from your experience, you would have to bite the headboard on it, and fully fund each of the existing payees and potential payees?
    1. Swami's Avatar

      Admittedly, I skimmed the post. But the issue is real and it is affecting tons of publicly-traded companies. One of the huge problems of the Fed's zero-rate policy is the explosion in pension liabilities from lower discount rates. Company after company is shutting these plans down and I doubt any will ever be started again. And they shouldn't - they're too risky for the provider.

      From the perspective that promises were made that should be kept, I understand the ref's view. But, the world has changed. In many cases, these promises simply cannot be kept, and won't. The refs should accept some compromise because it's worth waiting it out for the NFL.
    1. darvon's Avatar
      The only thing I see, and I will try to run this by my personal financial consultant/wife if she can manage the patience for something related to football, is in the recap:

      1) Decrease your existing net worth by over $1M per year to return.
      Is that supposed to read per year? Up to that point I was assuming it to be per person.
      Yep. Typo. Fixed. Thanks.
    1. darvon's Avatar
      From the perspective that promises were made that should be kept, I understand the ref's view. But, the world has changed. In many cases, these promises simply cannot be kept, and won't. The refs should accept some compromise because it's worth waiting it out for the NFL.
      But it isn't exactly a promise. It's a NFL Bond for $1.45M. Its a financial asset. If the Bond isn't going to jeopardize the survival of the company, which would make it worthless, why should I give up $1.5M for $.3M. The NFL is trying to buy back the bond for 20 cents on the dollar for no good reason.

      These 119 pensions as they sit now are NOT at financial jeopardy, and have no outlook at ever being so.

      In regular America, the pensions can jeopardize and even sink (see GM) a company, making the Bond worth less or possibly zero, thereby promoting a discount.

      If you had 15 year zero coupon NFL bonds for $1.5M dollars, what would YOU sell them for?

      And that is not even counting the reduction in benefits from this point forward that the NFL is proposing.

      I can't tell you what the refs should do, or not do. I do recognize that selling back $1.5M in NFL bonds, for $289K all to keep a $148K part time job is something I probably wouldn't do.

      It's a HUGE gap, that is really unusual to be asking of employees of a money-printing company.

      Also, when the media say "both sides should give a little" I doubt that they realize how big the gap is. I keep seeing $3M per year. That is wrong. It comes from the difference of last years NFL pension contribution of $47.5K and their proposed fixed contribution per year, times 119 refs.

      If you look at JUST the pensions/retirement. Its more like $175M giveback at signing and $500M loss over the 10 years, and that's only considering existing employees.

      Who ever heard of having to write a check to go to work? Other than college football, of course....
    1. Bengals1181's Avatar
      ProFootballTalk ‏@ProFootballTalk
      NFL and refs agree on backup officials, but pension issue remains http://wp.me/p14QSB-5yBX
    1. Docta's Avatar
      Update to Bengals post:
      As @mortreport is reporting, an agreement between NFL and NFLRA is at hand and both sides will work to have officials working this weekend.

      There is a God.
    1. wxwax's Avatar
      Great post, Darvon. Thanks for explaining it.
    1. kidjock's Avatar
      Good post, I enjoyed the breakdown, but then I am an Accounting major.
    1. wxwax's Avatar
      Peter King this evening said besides the pension, the other major sticking point was the pool of substitute officials. Now, he may have been schilling for Goodell, so I take it with a grain of salt. Saying it's not just about money makes the NFL look better.
    1. darvon's Avatar
      I think that IS a point with the NFL. However they want that so that they can jiggle the number of games a ref does and is paid for, in order to give them better power over the refs.

      Is that a bad thing? I dunno. Not necessarily, but why do they want it. Are they going to use it to give less games/payroll to the refs of lesser consequence? Why not just let them go?

      This sounds funny. Why do you want 2x as many refs, each doing half as many games? My spidey senses are tingling. Look for a joker.

      I have read that they have 2 spare teams each week, not counting bye weeks. So what gives?

      King says:
      And the league wants a plug-and-play farm system of three officiating crews to be developed, so that if, say, a back judge is struggling or has to retire, the league will have an immediate replacement. The officials are balking at the reduction in job security.
      Three more spares than the two now? How many refs on a squad in the NFL?
      How many spare tires do you need in a 16 wheeled car?
    1. BuckeyeRidley's Avatar
      "NFL reaches tentative agreement with refs


      AP Pro Football Writer

      Associated Press Sports

      updated 11:05 p.m. ET Sept. 26, 2012

      NEW YORK (AP) - The NFL and the referees' union have reached a tentative contract agreement, ending an impasse that began in June when the league locked out the officials and used replacements instead.

      With Commissioner Roger Goodell at the table, the sides concluded two days of talks at midnight Thursday with the announcement of a tentative deal, which must be ratified by the union's 121 members.

      NFL spokesman Greg Aiello tweeted "Pleased to report that an agreement has been reached with the NFL Referees Association. Details to follow."

      The replacements worked the first three weeks of games, triggering a wave of frustration that threatened to disrupt the rest of the season. After a missed call cost the Green Bay Packers a win on a chaotic final play at Seattle on Monday night, the two sides really got serious.

      It was not certain who would work this week's games, which begin Thursday night with Baltimore hosting Cleveland.

      © 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed."
    1. BuckeyeRidley's Avatar
      "@MikeGarafolo Goodell in statement: "Our officials will be back on the field starting (Thursday) night.""

    1. BuckeyeRidley's Avatar
      "Joint Statement from NFL and NFLRA

      The NFL and NFLRA are pleased to announce that they have reached an agreement tonight on an eight-year collective bargaining agreement, subject to ratification by the NFLRA.

      “Our officials will be back on the field starting tomorrow night,” Commissioner Roger Goodell said. “We appreciate the commitment of the NFLRA in working through the issues to reach this important agreement.”

      “Our Board of Directors has unanimously approved taking this proposed CBA to the membership for a ratification vote,” said Scott Green, president of the NFLRA. “We are glad to be getting back on the field for this week’s games.”"

    1. BuckeyeRidley's Avatar
      "@BobGlauber Told by NFL Referees Association negotiator Mike Arnold that ratification vote of the 8-year deal will be held on Saturday."

    1. BuckeyeRidley's Avatar
      I Love how the NFL breaks news in the Wiiiiii hours of the East Coast morning; LOL! Glad this garbage fire is winding down. It was fun to fuss about the refs and to hear other's humor but it wasn't cool that we had an hour long 1st quarter on MNF! Goodell's number being put online and the MNF ending taking center stage nationally took the cake. Good Morning America, The Today Show and other main outlets had a front page approach to story Tuesday Morning.

      Players get 10 year union deal and refs gert 8 year union deal. Will Goodell and De Smith still be heads of their organizations then? Its possible but looks dim.
    1. darvon's Avatar
      Throw a flag on trut.