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03 May 2004

Guest Column: Capologist for a Day

Guest Column by Chris Miraglia

Now corrects the issue of spreading out cap hit when player is cut after June 1.

The off-season: That magical time during the football year when the heroics of the game are left behind, in favor of a wave of complicated numbers, shifting players, and confused fans. Words like "unamortized bonus" and "cap hit" suddenly become part of the everyday vocabulary for players, coaches, and GMs.

The size of the NFL salary cap is based on a direct percentage of the amount of revenue the league makes in a given year. The cap has been rising in recent years because football's revenues have been rising in recent years. The percentage also changes each year, and is stated in the collective bargaining agreement: for 2004, it is 64.75%. Some of that 64.75% is subtracted for League Wide Benefits, such as Performance-Based Pay.  The rest is used for player salaries. Divide that number by 32 (the number of teams) and you have the salary cap for the following year.

For those of you who love math, here are the formulas:

Projected Gross Revenue x CBA Percentage = Players Share Gross Revenue

Players Share Gross Revenue - Projected League-wide Benefits = Amount Available for Player Salaries

Amount Available for Player Salaries / 32 = Salary Cap per Team

Now that we can understand the cap a little bit, we go on to that all important cap hit. Every dollar spent by a team will count against the cap eventually. That cap hit that you hear about whenever a player is cut is a result of the unamortized signing bonus, or the amount of money on the signing bonus that hasn't yet been counted on the cap. The signing bonus is the only guaranteed money a player receives, and it gets paid up front, but for salary cap purposes it gets evenly spread out across the life of the contract.

Here's an example of a typical contract structuring. Joe Smith (not the NBA player) recently signed a five-year, $10 million contract with a $5 million signing bonus, for $15 million total. His contract is back-loaded, so the first year is $500,000, the second and third year are both at $1.0 million, the fourth year is $3.5 million, and the fifth year is a whopping $5 million dollars. Common sense would say that his cap hit would be $3 million a year ($15 million / 5 years = $3 million a year). However, because of the nature of signing bonuses and the way his contract is structured, he'll only be a $1.5 million dollar cap hit for his first year, moving up to $2 million dollar cap hit for his second and third years. Suddenly a contract that's being reported as a $15 million contract looks a lot different.  After 60% of the contract is over, only $5.5 million is paid out, leaving $9.5 million over the remaining two years. The cap hit skyrockets in the fourth year from $2 million to $4.5 million, and in the fifth year the number goes from $4.5 million to $6 million a year.

Since the signing bonus is the only money that's guaranteed, a player can be cut at any time to save the base salary he's owed. Let's assume that Joe Smith's team decided to cut him after year three of his contract. You might think, "Alright, he's earned $5.5 million. The team will take a $9.5 million cap hit." However, since base salary isn't guaranteed to be paid, it doesn't count on the cap hit after he's gone. There are two years left on the contract, and the signing bonus was spread out over five years, leaving $2 million on the books. With Joe off the team, the $2 million "accelerates" and counts entirely during that year, a $2 million cap hit.  Since this is money on the cap that can't be used to pay actual players, it is known as "dead money." The year afterward, however, that money is freed up to do whatever with. By cutting Joe in year three, the team saved $2.5 million in usable cap space this year, and $6 million next year when Joe is completely off the books. In the long run, a five-year, $15 million contract became a three-year, $7.5 million dollar contract, only $2.5 million of which was earned through salary. Signing bonuses can be prorated to a maximum of six years.

What this all tells us is two things: It shows why backloading is so popular in the NFL, because it makes an actual amount of money a player will be getting seem much larger. It also shows why players are so insistent on signing bonuses, as it's the only money that they'll still get to keep if they're cut or injured. Most contracts are structured in a matter similar to Joe Smith's contract.

The Redskins and the Raiders are notorious for backloading their contracts, and it can explain how the Skins are never in cap hell. Most of the Redskins contracts are high signing bonuses, for medium to long terms. Most of the money happens in the later years. The positive is that this allows the Redskins to constantly make splashes in free agency. Generally, players are not that expensive in their first year or two with the team. Mark Brunell, in his first year, is making $760,000 in salary, but is receiving an $8.3 million signing bonus. That's only a $2.1 million cap hit in his first year. Players love this because they get paid upfront and guaranteed. The Redskins love this because it means that if a player isn't working after 3 years, they can easily cut him with relatively low consequences. The problems is that when a player gets hurt, it burns the team severely. They effectively paid a huge signing bonus for a player who will sit on the bench and can't be cut. The Skins also garner a good amount of dead money. Going into 2004, the Redskins lead the league in dead money.

Back to Brunell -- if he's cut after year three, the 'Skins are taking a $4.2 million cap hit, $1.4 million for each season of the contract that Brunell won't play. (Ed. note: OK, $1.383, but let's not get silly with decimals.)  That $4.2 million number, though, is actually cheaper than it would be to pay Brunell if he remained with the team -- and the $4.2 million comes all at once in one dead money hit. The next year, it's completely off the books.

June 1 is an important date for deciding which players to cut; it's the beginning of the NFL year, and players cut after that day have their signing bonus acceleration changed for the sake of the cap hit. Then the player in question takes the one-year cap hit he would have taken had he stayed with the team, with the remainder of the cap hit spread over the following year. Back to the Brunell example: let's assume, after three years, Brunell is cut on or after June 1. The cap hit to the Redskins is then spread over 2 years: $1.4 million for the current year, and the remainder of the signing bonus the next year, which in this case is about $2.8 million. Obviously a nice tool for teams to use so that they're not overburdened with dead money.

Older players have the benefit of veteran minimums -- the minimum amount of money a player can be paid based on how long he's been in the league. The table below shows the minimum salary a player can be paid, based on years.

Years Minimum
0 $225,000
1 $300,000
2 $375,000
3 $450,000
4-6 $525,000
7-9 $650,000
10+ $750,000

Even though the league minimum is higher, all minimum-salary players of four years experience or more only have a cap hit of $450,000. It's designed as a bit of a safety valve to prevent too much turnover among players. The cap savings really isn't that much though.

The NFL is often pressured to increase the salary cap number while reducing the power of the "dead money" hit, so that fan favorites don't have to leave teams due to deteriorating play. Jerome Bettis took a massive pay cut to stay with his team, but too many teams in the NFL are willing to sign a player on reputation alone. Warren Sapp, John Lynch, Junior Seau, and Emmitt Smith are all players whose play level has dropped, but were able to get significant signing bonuses from another team almost entirely on reputation. It might not be fair to the fans to see these players go, and I have a sneaking suspicion that the NFL will ultimately change these numbers around to add a veteran clause to the contracts after X number of years. We'll just have to wait and see.

Chris Miraglia is a journalism student from the University of Central Florida in Orlando. He is constantly irritated at how they never show AFC East games in Orlando, and is on a personal crusade to get the powers that be to stop showing Jaguar games.

Posted by: Guest on 03 May 2004