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The AFL's equalisation changes explained

Peter Ryan  June 4, 2014 8:45 PM

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Collingwood's Dayne Beams and St Kilda's Jack Newnes tangle during last Friday night's contest at Etihad Stadium

THE AFL introduced a set of changes to underpin the competition for the next two seasons after recognising that competitive balance needed to be addressed. A working party was established, travelled to the United States to examine how American professional sports managed the issue and after much debate and compromise, announced a raft of changes on Wednesday.

What do the changes really mean and why were they were considered necessary?

FOOTBALL DEPARTMENT CAP

Was: No cap. Gap widening to the point where there was about $5m difference between the expenditure of the biggest and smallest clubs.

Will be: A soft cap on non-player football expenditure will be implemented, set at:

•        2015: projected industry average spend plus $500k
•        2016: 2015 soft cap level plus CPI
•       A luxury tax will be applied to spend above the soft cap:
                       - 2015: 37.5 per cent
                       - 2016: 75 per cent
•        Luxury tax payments will be capped at $1m per club per annum for 2015 and 2016
•        Any cash impact for clubs will be phased in, with luxury tax on 2015 spend to be paid in 2016
•       The soft cap and luxury tax rate will be reviewed for season 2017
•       The decision to spend above the cap is at each club’s discretion – but capped to ensure clubs are not unfairly disadvantaged

Details of what items of expenditure are included within the football department and which items are exempt should be settled within weeks. It is likely player development managers will be exempt but other items are still being finalised.

Player development managers to be exempt from spending cap

Why is it necessary?

Evidence was mounting that a nexus existed between football department spend and on-field success.

The AFL figures if it taxes football clubs who want to spend above the minimum in their football department – for arguments sake $20m if total player payments are included – then clubs will either curb their spending or the AFL will receive money to put into shared revenue.

When the working party visited the United States it heard that five of six NFL clubs who were spending above the minimum pulled back their costs to avoid a tax once it was introduced.

The measure also acts as a lever to control the cost base of the competition and stop the so-called arms race in football department spending.

This is important because in recent seasons, the number and wages of support staff, including coaches, in football departments had increased significantly. New AFL CEO Gillon MacLachlan said non-player spend in football departments had been growing at the rate of 10 per cent a year for the past 10 years.

That was unsustainable. One reason for that was because clubs who received money to beef up their football department were chasing coaching staff and competing against other clubs to secure them. It meant disequalised payments were at risk of being used merely in the arms race to keep up with the spending of big clubs.

It means:
Costs will be controlled and gaps between clubs will diminish rather than widen. Most impact is expected to be at the fringes, with clubs assessing what expenditure is absolutely necessary. Many clubs have been going through that process for 12 months and employment is likely to remain unaffected.

Click here to read the AFL's full statement

SALARY CAP

Was: Guaranteed 3 per cent increase built into the collective bargaining agreement.

Will be: Increase TPP by an additional $150,000 per club in 2015 and in 2016 above already contracted amounts:
‒ 2015: increase from $9.92m to $10.07m (+$150,000)
‒ 2016: increase from $10.22m to 10.37m (+$150,000)

TPP increases to be self-funded by larger clubs and supported by increased revenue sharing for smaller clubs

Why the slight increase?

If new equalisation policies weren't introduced, the players were making noises about industrial action because they were the only group in the football industry who had a cap on their income.

The CBA had mandated an increase of 3 per cent in 2015 and 2016. This increase of just above 4 per cent, negotiated through the collective bargaining review, goes just above that mandated increase.  

Some clubs remain unable to pay 100 per cent of the AFL salary cap and still meet their KPIs as required by the AFL. Paying 100 per cent of the cap is considered the minimum requirement for clubs to remain competitive, being able to attract and retain players.

The advent of free agency has made it even more critical. Although all clubs are allowed additional service agreements, some clubs find it harder to service them than others.

McLachlan indicated six clubs struggled to pay 100 per cent of salary in 2014. However they will be eligible, if financially strong enough, to spend above the cap in 2015.

What it means:
Negotiations around the next collective bargaining agreement in 2017 will be interesting. Players will want to see a significant change and believe every club has a chance of winning the premiership.  

Save, then spend: League's new player payments scheme announced

A NEW TPP BANKING MECHANISM


Was: Clubs had to pay between 95 and 100 per cent of salary cap each season. Clubs often prepaid players, which sometimes created problems down the track if predicted success did not happen, removing flexibility.

Will be: The introduction of a new TPP banking mechanism that allows clubs to spend over 100 per cent of the TPP and ASA limits (combined limit), if in any of the preceding two years the club spent below 100 per cent of the combined limit.

The permitted amount of overspend is commensurate with the level of underspend in the relevant preceding period.

For instance, if a club was $500k below the combined limit in 2015, it can spend up to $500k over the combined limits across 2016 and 2017

The overspend amount in any given year permits a club to spend up to a maximum of 105 per cent of the combined limit in that year.

This mechanism is effective from season 2015 (as such any underspends in 2013 and/or 2014 can be recovered in 2015)

Why was it changed?
The AFL wants battling clubs to use extra funds on players as it rises up the ladder and manage its list more efficiently as it does so. This measure provides more flexibility without locking clubs into pre-payments and unnecessary speculative future projections of talent.

What will it mean?

Clubs on the rise will be able to retain and acquire talent more easily.

VETERANS LIST

Was: Clubs were granted a salary cap allowance for players with 10 completed years or more with the club (no longer an age requirement of 30 years) to keep veterans. The amount of the allowance has been calculated as a fixed percentage of TPP per player based on the average amount of football payments excluded from the TPP for players on the veterans list for seasons 2007-09, divided by the average number of players with 10 or more years' service at one club during that period. The fixed percentage has been set at 1.229 per  cent and the allowance per player in 2014 is $118,380.

Will be: Current veterans allowance to be retained at $118k per eligible player in 2015 and 2016, with the AFLPA agreeing to abolish it from season 2017.

When: To be introduced in 2017

Why it was changed?
One of the principles agreed to in March was that clubs aspired to move towards a pure draft and salary cap. It was felt that clubs such as Geelong and the Sydney Swans had a significant advantage with more than five veterans on their lists and therefore an extra $500,000 in their salary cap. Several clubs have been unable or unwilling to pay eligible veterans outside the salary cap, accentuating the advantage to clubs with several veterans.

What will it mean?
Opponents have been concerned about the potential negative effect on culture if older players leave the game quickly and there is also an argument that clubs deserve a reward for creating an environment that retains players for 10 years. Other clubs saw the veterans' allowance as one defence against free agency.
However it will reduce inequities between lists. Whether what is lost is worth what is gained remains to be seen.

SHARED REVENUE

Was: Disequalised fund with AFL allocating money to clubs based on need. The AFL has overseen management of funds but it has been reluctant to interfere in decision-making.

Will be: Wealthy clubs will receive less funding from the AFL. However, clubs retain all revenue they generate themselves. This is a significant concession to wealthy clubs who were not keen to share revenue they generate. Gaty levies and a beverage sharing model will be retained.

Why do some clubs need to be compensated with shared revenue?

If you accept the current structure and objectives of the competition then it is necessary to compensate clubs.

That compensation will be lower than the AFL initially hoped, with a cap placed on the amount of dollars that will transfer from wealthy clubs to other clubs in one season.

History suggests all clubs are poorly managed from time to time so the main issues making some clubs richer than others are fixtures, stadium returns and supporter bases.

FIXTURE

If fixtures are to be designed to maximise attendances and television ratings, then the big drawing clubs must have the prime time slots (Friday nights) and blockbuster games (Anzac Day, Queen's Birthday).

Fulfilling that objective multiplies the power of bigger drawing clubs because it increases their gate receipts and membership, as well as sponsorship opportunities. It works in reverse for poorer drawing clubs.

However, 18 clubs are needed for nine games a weekend televised into all markets in Australia, so poorer drawing clubs need to be compensated for accepting that principle of designing a fixture to maximise attendances.

The AFL acknowledged on Wednesday the fixture inequities underlined that competitive balance measures were required.

STADIUM RETURNS

Rationalising grounds suits bigger drawing clubs because optimum returns at the major stadiums come when there are big attendances.

Smaller clubs have to play their home games at grounds that are not set up to provide returns once the crowd dips below a certain level because of the fixed costs of putting on the game.

Clubs such as Adelaide have an added advantage of selling out memberships because of the difficulty of securing a seat at its home ground unless a membership is bought, while Geelong has at least seven home games a year that make the club $500,000 per game.

The stadium deal at Etihad has been a drag for several clubs, with the net return on revenue having a negative impact on their revenue.

SUPPORTER BASES

Supporter bases were established in the first half of last century for most clubs. It made the big four clubs Collingwood, Carlton, Essendon and Richmond powerful. Only Hawthorn has managed to increase its supporter base massively but it has needed to have constant success. It also made the smart decision to play games in Tasmania – and foster the relationship – and use Waverley as a home base and capture the Eastern corridor. But it took 20 years of success, hard work, good decisions and a bit of luck to make it happen. The Eagles and the Crows had a massive initial advantage over their home state rivals because they were the first club established.

It’s also worth noting that merely introducing a luxury tax was not going to redistribute income because – as mentioned above – many clubs would adhere to the minimum and stop spending.