Writers of Pro Football Prospectus 2008

16 Jul 2010

Under the Cap: Cash Budgets

by J.I. Halsell

Last week, the New York Jets signed left tackle D'Brickashaw Ferguson to a contract extension that has sparked some media debate about its true value. The initial reports valued the deal as a six-year extension with $60 million in new money, of which nearly $30 million is guaranteed. Meanwhile, others have reported it as a one-year deal worth $5.3 million, of which $4.7 million is guaranteed. The truth lies somewhere in the middle.

To understand Ferguson's extension, one must first understand his previous contract. In that contract, his rookie deal, Ferguson was slated to earn $3.1 million in 2010. His 2011 compensation was set to equal to the 2011 franchise tag salary for offensive linemen. Since that number isn't set until the 2011 offseason, $10 million dollars was negotiated as a placeholder. Moreover, his 2011 compensation was set to be guaranteed on the last day of the 2010 league year, which would have been around Feb. 28, 2011. On the conservative side, Ferguson had $13.1 million in what we call old money, which could have been closer to $14 million depending on the value of the franchise tag.

Ferguson's new contract is actually an eight-year contract worth $73.1 million, but when you subtract out his two old years and the conservative $13.1 million assumption of old money, you get a six-year extension worth $60 million and an average per year of $10 million. But, again, the more likely old money number is $14 million, which would drop the new money total to roughly $59 million. Not calculated in the $60 million of new money are two phony incentives worth $1.3 million that, from a team salary accounting perspective, are deemed as likely to be earned. Without going into the details, these "phony in reality, yet likely in accounting" incentives are simply in the deal to make the contract compliant with the 30-percent rule.

The contract is particularly interesting in its structure. The 'Niners contract extension with linebacker Patrick Willis illustrated a structure that could be used to reward a young player while remaining 30-percent rule compliant. In short, as I wrote in May, the Willis deal was largely achieved via a $15.5 million signing bonus and $4.8 million supercede signing bonus. The Ferguson deal is a far cry from the Willis deal, but the Jets have Ferguson, Darrelle Revis, Nick Mangold and even David Harris to extend after 2010. It's an easy assumption that the Jets had a cash budget in mind the contracts of Ferguson and the other players. During my time with the Redskins, not only did I have to assist in the management of our salary cap, but I also -- as surprising as this may be -- had to do so within a cash budget. This is definitely a significant consideration in contract negotiations.

Understanding this cash budget is key to understanding Ferguson's deal. Ferguson received a $1.6 million signing bonus and July 12th roster bonus of $3.1 million; his 2010 salary will be $630,000. These numbers add up to $5.3 million in 2010 compensation. On its face, meaning at the time the deal was signed, the contract only guaranteed the signing bonus and a roster bonus, totaling $4.7 million.

So how do some say that this deal guarantees nearly $30 million? Ferguson's deal has his 2011 $5.6 million salary and 2012 salary of nearly $10 million become guaranteed for just skill on Feb. 15, 2011. His 2013 salary of $7.25 million becomes guaranteed for skill on Feb. 15, 2012. When you add his 2010 guaranteed and non-guaranteed compensation of $5.3 million plus his future year skill-only guarantees, you come up with a little more $28 million in guaranteed money. Ferguson also has a 2011 $3.9 million option bonus, but this bonus is not considered guaranteed as it's not backed up by future year salary guarantees to ensure that he gets the $3.9 million either way. Therefore, by mid-February 2012, Ferguson will have earned $32 million.

The 2011, 2012, and 2013 salary guarantees for skill highlight the guarantee reallocation rule of the uncapped year. The reason why the Jets could not guarantee these salaries for skill and injury is because Ferguson's 2009 salary of $2.9 million was not fully guaranteed -- only $680,000 of this 2009 salary was guaranteed. The reallocation rule in essence says that unless the salary in the final capped year is fully guaranteed, then any future year salary guarantees for skill and injury will be reallocated into the final cap year. Had the Jets guaranteed the $22.9 million of future year salaries for skill and injury, then that $22.9 million would have been retroactively reallocated to the Jets' salary cap of 2009. The Jets finished the 2009 league year with $376,000 in cap space and therefore could not have afforded the $22.9 million reallocation. The deal, therefore, would have been denied by the NFL Management Council. Therefore, the Jets were able to get around the reallocation rule by guaranteeing the amounts for either skill or injury, but not both.

The Eagles incurred retroactive rellocation in their renegotiation with quarterback Kevin Kolb, where $2.1 million of his salaries in 2010 and 2011 were guaranteed for skill and injury, resulting in that $2.1 million being allocated to 2009. However, because the Eagles finished the 2009 league year with $4 million in cap space, they could afford the reallocation of this guarantee.

The vast majority of the time, a player's contract is terminated for skill. The only instance in which an injury guarantee is applied is in the case of a catastrophic injury to the player, for which many players have separate insurance policies. So while the Ferguson deal isn't as straight forward as the Patrick Willis deal, the Niners also don't face the contract obstacles that the Jets currently face with their talented young players. At the end of the day and practically speaking, the Jets aren't going to terminate Ferguson prior to 2011, so he'll get his money. And that's all any player and agent ever want.

Posted by: J.I. Halsell on 16 Jul 2010

16 comments, Last at 20 Jul 2010, 10:12am by WF

Comments

1
by JasonG (not verified) :: Fri, 07/16/2010 - 1:22pm

Really glad to have someone to explain this. As a suggestion, though, I wonder if tabulating this info wouldn't help the reader understand it better. For example, column headers "2010" "2011" etc and rows "Base" "Signing Bonus" "Roster Bonus" etc. Then in each cell you could put the amount plus any descriptors necessary such as "guaranteed on DATE for skill only" or whatever. Just a suggestion. Maybe try it out next time.

Regardless, thanks for the analysis.

3
by Lance :: Fri, 07/16/2010 - 2:29pm

Agreed that while there's a lot of interesting detail, it's almost impossible to follow. Charts like the one JasonG suggested would help.

2
by Revenge of the NURBS (not verified) :: Fri, 07/16/2010 - 2:05pm

"Meanwhile, others have reported it as a one-year deal worth $5.3 million"

Florio keeps saying that, and it never sounded right to me. If that were accurate, it would be a Ricky Williams/Master P level of bad contract. Thanks for the real breakdown.

9
by Noah of Arkadia :: Sat, 07/17/2010 - 10:07am

Technically it is a 1 year contract as the Jets could cut Brick after the season and not pay him one more cent. But as our man here says, what sense does that make? The Jets aren't cutting him, so they'll end up paying him at least his 3-year total... barring a devastating injury.

11
by Revenge of the NURBS (not verified) :: Mon, 07/19/2010 - 10:08am

Exactly. They aren't cutting him after one year, absent an injury so severe as to obviously be career ending right on the spot. A torn ACL probably wouldn't do it.

Yes, such an injury could theoretically happen, but it seems pretty unlikely. And as was mentioned above, he can purchase an insurance policy against that contingency if he feels that the risk is unacceptably high. So the chances of this deal actually ending up as 1 year/5.3 million are virtually none.

4
by Dean :: Fri, 07/16/2010 - 3:57pm

Since the contract is not guaranteed for injury, could Ferguson then go out and buy an insurance policy which would then guarantee the contract for injury? He'd have to pay the premium out of his own pocket, but I would think that if he could do it, it'd probably be a small price to pay - especially if his financial advisor is managing his portfolio properly.

14
by dryheat :: Mon, 07/19/2010 - 2:30pm

According to Florio, he'd done just that.

5
by scottyb (not verified) :: Fri, 07/16/2010 - 4:30pm

Forgive my ignorance, but what is the 30% rule?

7
by Lance :: Fri, 07/16/2010 - 11:28pm

From here:

"The '30% Rule' governs veteran contracts that are entered into in a capped year and extend into the final year of the CBA. The rule states that these contracts cannot have an annual increase of more than 30% of the salary, excluding amounts treated as a signing bonus, provided for in the FINAL CAPPED YEAR."

If I'm reading this correctly (and there's a good chance I'm not), it sounds like this is a way to stop (in theory) one from offering some free agent in 2008 a contract that looks like:

2008 (capped year): $1.5 million
2009 (capped year): $2.25 million
2010 (uncapped year): $15 million

Thus pushing a lot of money into a year where there is no cap.

8
by J.I. Halsell :: Sat, 07/17/2010 - 2:20am

My article on the 30% rule using Patrick Willis' new deal as an illustration: http://www.footballoutsiders.com/under-cap/2010/under-cap-30-percent-rul...

J.I. Halsell
Salary Cap Analyst | "Under the Cap"
Twitter | @SalaryCap101

10
by scottyb (not verified) :: Sun, 07/18/2010 - 4:41pm

Thanks, Lance and J.I.

6
by Miguel (not verified) :: Fri, 07/16/2010 - 4:48pm

Any chance that you can list the 2009 cap space for each team?

12
by Timmy (not verified) :: Mon, 07/19/2010 - 12:13pm

What were the phony LTBE incentives and how does this factor into the cap?

13
by Revenge of the NURBS (not verified) :: Mon, 07/19/2010 - 12:37pm

I was dogging on Florio a little bit above, but he did have some good information about this. I remember he had something about a bonus for blocking 7 kicks in a season, or something ridiculous like that. I don't know if that's specifically what's being referred to in the article here, but it's a textbook example of a phony bonus that will never be earned.

15
by dryheat :: Mon, 07/19/2010 - 2:35pm

If I'm not mistaken, a bonus is LTBE if the player would have achieved it the previous year. Right now a gazillion dollar bonus for Drew Brees winning the Super Bowl MVP would be a LTBE, and a NLTBE for every other player in the league.

Perhaps that's a gross generalization, but that's the gist.

Oh, and this is where the blocked kick thing comes in: All special teams bonuses are considered LTBE.

16
by WF (not verified) :: Tue, 07/20/2010 - 10:12am

Insightful as always.