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.

Assumptions:

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?

$288,534.19

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.