SALARY CAP FAQ’S

Salary Cap SALARY CAP FAQ’S

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Al Lackner is an insightful and analytical writer for AskTheCommish.com.  He has appeared on our radio program GAMETIME on several occasions and has a mastery of the NFL’s salary cap.  Al has granted us permission to feature some of the highlights of his work here with the salary cap basics plus some frequently asked questions.  What isn’t answered here almost certainly can be found on the AskTheCommish link below.
 
Caponomics 101
 
Are you confused beyond belief about the NFL Salary Cap? Is it impossible for you to understand why some teams are WAY over the cap, while others are way under?

Fear not. The Commish is here to help. Our goal is to provide you with a quick course in Capanomics so that you can understand what is going on here. By the time we’re through with you, you will have the knowledge and power to second guess your favorite team’s General Manager!

 
The notion of the Salary Cap itself is a relatively simple one. Each team is granted a specific amount of money they can spend on player salaries. For 2001, that amount was about $67.4 M. For 2002, that amount was about $71.1 M, and in 2003 it was about $75.007 Million. For 2004, even higher revenues pushed the cap to $80.582 Million, and in 2005 it reached about $85.5 Million.
 
Originally, the NFL informed teams that the 2006 figure was going to be approximately $94.5 Million. However, once the owners and NFLPA voted to extend the CBA, which was due to expire after the 2007 season, their model for calculating the cap changed. Thus, the revised salary cap for 2006 was set to $102 Million.
 
Had the CBA not been extended, 2006 would have been the final capped season, and there would NOT have been a cap in place for 2007. Additionally, had the 2007 season carried on WITHOUT a salary cap, the NFLPA warned that they would never again agree to reinstate another cap. Mercifully, both sides averted out-and-out labor war with the extension of the CBA. For 2007, the cap will be $109 M.
 
FREQUENTLY ASKED QUESTIONS
 
How much does each team have to spend against the NFL Salary Cap?
 
Answer: In 2005, it was set at $85.5 Million. Last year it was originally set to be approximately $94.5 Million. However, an extension to the CBA brought with it a new formula, which saw an expansion to approximately $102 Million. The cap in 2007 is set to be $109 Million.
 
How is the NFL Salary Cap determined?
 
Answer:The Cap is determined through a complicated calculation system, which has changed with the latest extension of the CBA. The Cap is based on income that the teams earn during a League Year. Originally that "pot" was limited to what was known as Defined Gross Revenues (DGR), which consisted of the money earned from the national televison contract, ticket sales, and NFL merchandise sales. Under the new agreement the "pot" has been expanded to include total revenue. Thus, other sources of revenue, including such other items as naming rights and local advertising, have been added. As was the case with the original DGR, the expanded revenue is divided equally amongst all 32 teams for purposes of claculating the salary cap.
 
Is there a Minimum Salary?
 
Answer: Yep. Under the new CBA, the players are guaranteed 50% of Leaguewide Total Revenues. In the event that player costs are less that 50% of Total Revenues, then, on or before April 15 of the next League Year, the NFL shall pay an amount equal to such deficiency directly to the players.
 
More specifically, beginning in 2006 each team had to pay a guaranteed Minimum Team Salary of 84% of the Salary Cap. Each year that percentage goes up by 1.2%, which means that it is 85.2% this season. However, the Minimum Team Salary cannot extend beyond 90% of the Salary Cap. Any shortfall in the Minimum Team Salary at the end of a league year has to be paid, on or before April 15 of the next league year, by the team(s) having such shortfall, directly to the players who were on that team’s roster at any time during the season.
 
Now you know why some of the smaller market owners had issues with the new CBA!
 
 How do you define "Salary"?
 
Answer: Salary means all compensation paid to a player, including money, property, investments, loans or anything else of value. Salary, however, does not include benefits. Furthermore, a player’s salary will also include compensation for non-football-related services if such payment does not seem to represent an approximate fair market value. This broad definition of salary becomes complicated because it is affected by numerous rules which are used in computing the precise nature of the system.
 
Who falls under the Salary Cap?
 
Answer: The "Team Salary" falls under the Salary Cap. Team salary includes the amount a team must pay its current or former players under their player contracts. Notice emphasis on the word PLAYERS. The salary cap does not apply to coaches, assistants, trainers, and other personnel. Only the top 51 player salaries for a team count against the salary cap in the offseason. During the season, all player salaries count toward the salary cap.
 
How does the NFL Draft impact the Salary Cap?
 
Answer: Team salary includes the Rookie Minimum Active Salary as of the day of the draft for all drafted rookies. The salary for drafted rookies will stay at this amount until the player is signed, the team’s rights are relinquished through waivers, or until the Tuesday following the tenth week of the regular season if the player remains unsigned.
 
Do unsigned free agents have any impact on the Salary Cap?
 
Answer: For Restricted Free Agents (RFA), a Qualifying Offer is included in the team salary. This amount remains in team salary until the player is signed, the Qualifying Offer is withdrawn, or a “June 1st tender” is made. If the player is unsigned and the Team makes a June 1 or June 15 offer, this offer will be included in team salary until the player is signed, the team gives up their rights to the player, or until the Tuesday after the tenth week of the regular season if the player is unsigned.

For Unrestricted Free Agents (UFA), if a June 1 offer is made, the amount afforded will be included in team salary as of July 15.

For transition and franchise players, an offer will be included in team salary when it is made.

These offers for UFA, transition players, and franchise players will remain included in team salary until the player is signed, the offer is withdrawn, the team gives up their rights to the player, or until the Tuesday following the tenth week of the regular season if the player is unsigned. All offer sheets will be included in team salary when the offer is made until the player is signed to a contract with any NFL Team or the offer sheet is withdrawn. 

 
If a player earns a contract that is 5 years and pays him a total of $20 Million, he counts $4 million per year against the cap, right?
 
Answer: If it were only that simple.

Teams with heavy payloads learned quickly that the best way to combat the Salary Cap was to circumvent it. They did this by back loading contracts, pushing all of the big money to the end of the contract. For example, a 5-year, $20 million contract (not counting a signing bonus) signed in 2005 as described above could possibly allocate the money in the following manner:

Year 1 (2005): $450,000 (min. cap given to players with 4+ years experience)
Year 2 (2006): $1 million
Year 3 (2007): $1.5 million
Year 4 (2008): $5 million
Year 5 (2009): $12 million

Note: Thankfully the extension of the CBA prevented a contract, like the one above, from violating the league’s "30% Rule". 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. Had the CBA not been extended, then 2006 would have been the final capped year and this contract would not have been valid.

 
That’s cheating!  How can you have a real salary cap if all you have to do is give a player a signing bonus to get around it?
 
Answer: Now we come to the tricky part.  The signing bonus IS part of the player’s salary. So it counts against the cap. When determining team and player salary, the signing bonus will be prorated over the length of the contract.

For example, if a player signs a four-year deal with a $1 million signing bonus, $250,000 of that bonus will count toward team salary for each contract year ($1 million divided evenly over the four-year contract is $250,000 per year). If a team releases a player, the unamoratized bonus money (the remaining prorated bonus money) counts immediately against the cap.

In our example above, if the player is released after Year 1, the remaining $750,000 (the prorated signing bonus money for years 2-4) counts against the cap in Year 2 — even though the player is no longer on the team’s roster.

 
Again, let me take a moment to explain how important the extension of the CBA was. The proration of the signing bonus cannot extend beyond two years after the close of the existing CBA. With the CBA originally set to expire in 2007, that would have meant that the bonus proration had to be fully accounted for by the end of the 2009 season. Of course, if the CBA had not been extended and there were no cap in place in 2007 and beyond, you are probably wondering why this even matters. Simply put, it matters for two reasons:
 
1. There would have been a major cap ramification for 2006, the final capped year under that CBA.
 
2. As all went well in the Spring 2006 meetings, and the extension was put in place — the cap situations associated with existing contracts will obviously still need to be dealt with.
 
An expression that was thrown about repeatedly during last season’s labor meetings was "cash over cap". Well, these signing bonuses are what insiders were talking about, when they brought up that term. One of the things that held up negotiations amongst the owners was the move to place some kind of cap on the amount of signing bonus money that could be pushed into future years for cap accounting purposes. Although there was no cap on signing bonuses, there was a limit put in place (for 2006) that signing bonuses could only be prorated for up to five (5) years — but that moves up to six (6) years in 2007.
 
How difficult is it for a player to renegotiate his contract?
 
Answer: Salary renegotiations help teams greatly in getting under the salary cap in a given year. But they also lead to peril down the line. Indeed, every NFL team that is facing salary cap problems in 2007 can trace their problems back to overuse of this practice.

The first renegotiation of a veteran contract can take place at any time. However, a veteran may not renegotiate to raise his salary for twelve months after the most recent renegotiation. Additionally, no player or team can agree to renegotiate a term of a previously signed contract for a prior year. No contract can be negotiated for a current season after the last regular season game. Furthermore, rookie contracts cannot be renegotiated for one year after the signing date or the following August 1, whichever is later.

No player can agree to a contract, renegotiation, or extension that expires before the last day of a season. If a player wants to terminate his contract, he must do so before the first day of any season.  Moreover, renegotiated contracts are revalued for Salary Cap purposes at the time of the renegotiation. If at the time of the renegotiation an incentive bonus has already been reached, that bonus is considered Likely To Be Earned (LTBE). Also, any new or changed incentive bonuses renegotiated after the start of the regular season are automatically considered LTBE. Finally, if a player is paid any more than the minimum amount for off-season workout programs or classroom instruction, then the payment will be treated as a renegotiation.

 
If a player decides to renegotiate his contract, how does the bonus money he received in the original contract count against the cap?
 
Answer: If a player renegotiates his contract and gets a new signing bonus, the new signing bonus is prorated over the remaining years of the original contract AND over the extension. The allocation of the original signing bonus remains unchanged.

For example, Player X is currently in the third year of a four-year deal (2005–2008) that paid him a $1 million signing bonus.  In 2007, Player X renegotiates his deal extending his contract to the 2010 season while getting a $2 million signing bonus.  The original $1 million signing bonus is allocated at $250,000 per year over 2007 and 2008 just as it would be if there were no renegotiation.  However, the new $2 million signing bonus is allocated at $500,000 per year over the remaining two years of the original contract (2007–2008) and the extended two years (2009–2010). Thus the cap liability in 2007 and 2008 is actually $750,000 for the signing bonus proration — and $500,000 in 2009 and 2010, assuming no additional renegotiation takes place.

 
When must teams come in compliance with the Salary Cap?
 
Answer:  March 2.
 
If that is the case, why are so many players cut AFTER June 1?
 
Answer:  After June 1, the team can stretch their salary cap liability over the next 2 seasons. Let’s look at our example above, where a player signs a big contract for 4 years, including a $1 million signing bonus.

If the player is cut after the first year of the contract, the remaining $750,000 of the "un-amoratized" signing bonus hits the cap immediately (accelerates).  However, if he is cut after June 1, the team can spread that money over Year 2 and 3 of the contract instead of taking the full brunt of the cap hit in Year 2.

Doing this will save $500,000 against the cap hit for Year 2.

Clearly, this practice is a nice way of freeing up cap space in a given year.  Note, however, that the money still has to be accounted for against the cap — and the remaining $500,000 that was never accounted for will hit the cap in Year 3.  In essence, many NFL teams have mortgaged their future by overusing this practice, whereby they continue to pay against the cap for players who have not been on the roster for over a year.

 
This was another important benefit that would have gone out the door if the CBA had not been extended. Namely, with no cap in 2007, teams would not have had the luxury of being able to extend this acceleration beyond 2006.
 
How do voided years work when amortizing signing bonuses?
 
Answer:  Many contracts in the NFL these days included clauses for "voided years".  These are typically incentive-laden additions to contracts that will allow the player to file for Free Agency sooner if certain goals are obtained.

The likelihood of voiding years can be included when determining the term of years for the prorated signing bonus.  However, if the player meets the goal that voids the year (or years) of the contract, any amount of the signing bonus that was allocated to the voided year (or years) will be accelerated and added immediately to team salary.  If the accelerated signing bonus puts the team over the Salary Cap, the amount that the team is over the cap will be deducted from the team’s Salary Cap for the next year.

If a player can void a contract based on a “Likely To Be Earned" incentive, and the player is on the roster at a later time, there will be no acceleration.

If a contract is renegotiated to reduce the number of years of the contract, the portion of the signing bonus that has not been allocated is included in team salary at the time of the renegotiation.

 
How does the NFL Salary Cap treat cash incentives?
 
Answer:  All incentives are included in team salary if they are "likely to be earned" (LTBE).  LTBE incentives are performance levels that the player or team has reached in the previous year.

For example, if a quarterback threw twenty touchdowns last year and his incentive clause for this year is set at fifteen touchdowns, then this incentive is “likely to be earned.”  Also, incentives that are in the sole control of the player, like non-guaranteed reporting bonuses and off-season workout and weight bonuses, are considered LTBE.

An impartial arbitrator will hear disputes between the owners and the players concerning what should be considered LTBE (especially for rookies or veterans who did not play in the prior year).  Conversely, if a player did not reach the performance incentive in the previous year, the incentive is deemed "not likely to be earned" (NLTBE) and is not included in team salary.

To determine whether a clause is LTBE or NLTBE for Salary Cap purposes (i.e., not whether the player actually earned the incentive), it is necessary to look at the performance of the team in the prior season, not the current season.

For example, assume Player X receives an incentive bonus if he participates in 50% of the team’s offensive plays this season.  Assume further that last season the team had 1,000 offensive plays.  Therefore, as soon as Player X plays in 500 plays in the current season (or 50% of last year’s 1,000 plays), the incentive will be considered earned for Salary Cap purposes.

The same incentive is considered "not earned" if the same player in the current year only participated in one of the team’s first 502 offensive plays.  In this situation, it would be impossible for the player to achieve the 50% incentive based on last year’s performance of 1,000 plays.  It is important to remember that looking to last year’s performance level is only for Salary Cap purposes and will not affect the player’s right to receive a bonus for his performance in the current year.

 
So cash incentives work almost like signing bonuses, right?
 
Answer:  The short answer to this question is that incentives are considered signing bonuses; however, for cap purposes they are not handled exactly the same way as "signing" bonuses.

While we’re on the topic, let’s talk a bit more about signing bonuses…

Also included in the “bonus” are guaranteed reporting bonuses and guaranteed workout bonuses.  Roster or reporting bonuses earned or paid before preseason training camp are also considered bonuses.  Guaranteed salary advances or advances that do not have to be repaid are treated as signing bonuses.  Money guaranteed or paid for option years, contract extensions, contract modifications, individually negotiated rights of first refusal, and option buyouts are considered signing bonuses.  Reporting bonuses are treated as signing bonuses if the contract is signed after the start of training camp.  Roster bonuses are also considered signing bonuses if the contract was signed after the last preseason game.  Finally, individually negotiated relocation bonuses are treated as a signing bonus.

The non-guaranteed amount of any salary advance, off-season workout bonus, off-season roster bonus, or off-season reporting bonus is included in the team’s salary in the year it was earned.  These bonuses cannot be prorated.  â€œGuaranteed” refers to those bonuses that are fully guaranteed–regardless of skill, injury or termination of the contract.

Contracts signed, renegotiated, or extended in the final capped year are governed by a somewhat special set of rules if the signing bonus is to be paid to the player in the final capped season. In this situation, a salary advance that the player is not obligated to repay is considered a signing bonus. Any off-season workout bonus that calls for a player to participate in less than thirty-two days of the team’s program is also considered a signing bonus. Finally, all off-season reporting and roster bonuses are considered signing bonuses.

Whew!

 
What is to prevent a player from signing a huge contract, commanding a large (guaranteed) signing bonus, then never playing a single down in the NFL?
 
Answer:  I call this the "Barry Sanders Rule".

Due to the Salary Cap, owners are now investing a greater amount of money up front for players in the form of guaranteed signing bonuses.  Thus, the owners must try to protect their investments by including language in the contract that calls for a player to return a portion of the signing bonus to the team if the player “fails or refuses” to practice or play with the team.

In certain situations, a team will be repaid some of the signing bonus it paid to a player (i.e., a refund), or a team will fail to pay part of a signing bonus that was already allocated toward team salary.  If this happens, the amount previously included in team salary will be added to the team’s Salary Cap in the next year.

 
What happens if a player is traded or retires?
 
Answer:  We already know that if a player is waived on or before June 1, the remaining signing bonus that has not been included in salary “accelerates” and is included in that year’s team salary.  Acceleration also occurs when a player is traded or waived and picked up by another team.  The new team is not responsible for any of the original signing bonus.  The team that waived or traded the player is responsible for the accelerated signing bonus (in the same manner as described above).

In most cases, if a player retires, the remaining signing bonus that has not been included in salary “accelerates” and is included in that year’s team salary.  Thus, the team will take an immediate salary cap hit of the remaining signing bonus.

 
So…what happens if a team goes over the Salary Cap?
 
Answer:  The short answer is simply that NO team CAN go over the Salary Cap.  Note that every contract must go through the NFL League Office before the deal can be made official.  Presumably, one of the things the league must do at this time is determine whether or not the contract would violate the NFL’s Salary Cap.  If the deal does violate the cap, then the NFL will reject it.
 
If a team releases or trades a player and the signing bonus acceleration puts a team over the Salary Cap, the team will have seven days to conform with the Salary Cap. However, they may not sign any players until there is room to do so under the Salary Cap.

There have been instances in which a team has managed to sneak a cap evading contract by the league.  Upon further review, the violations were caught by the league and the respective teams were penalized.  Penalties include fines and/or forfeiture of draft picks.  In recent history both the Pittsburgh Steelers and San Francisco 49ers have been penalized draft picks, while the 49ers’ front office personnel (Carmen Policy and Dwight Clark) were also fined.

 
What changes were made in the most recent extension to the CBA and what affect does that have on the Salary Cap?
 
Answer:  As stated, the latest (and 5th) extension to the CBA was passed by the NFLPA and owners on March 8, 2006. Listed below are the changes that were made:
  1. Extension through 2011 rather than 2007.
  2. The Salary Cap % will be based on an newly defined and expanded revenue stream, which includes additional sources not covered under the original DGR. That Salary Cap % varies from 57% to 58% during the life of the CBA. (See Question 1.2)
  3. Minimum salaries have changed as follows:
 
Years
2007
0   
$285,000
1   
$360,000
2   
$435,000
3   
$510,000
4-6   
$595,000
7-9   
$720,000
10+   
$820,000
  1. All minimum salaries for veterans (plus up to $40,000 signing bonus) with at least four years of experience will only count $435,000 against the team salary cap for qualifying contracts.
  2. Teams can sign rookies selected in the first half of the first round of the NFL Draft to a contract that is at most 6 (six) years. Players taken in the second half of the first round can only be signed to deal with a maximum 5 (five) year duration. Players taken after round one cannot be signed to a deal longer than four (4) years. Meanwhile, rookie contracts can not be renegociated in the first two (2) years.
  3. Prior to the start of the league year, teams may designate up to two (2) veteran players that they will cut after June 1 to spread out the signing bonus escalation (See 1.9b). In so designating them, the team allows these players to become free agents at the start of the free agency period — although their cap liability remains with the original team just as it would have if the player had stayed on the roster until after June 1.
  4. Just as is the case with the Franchise Tag, if the designated player signs the the one-year Transition tender, then that salary is guaranteed. Also, for both Transition and Franchise tags, the old March 17 date goes out the window. Under the old CBA, teams had until March 17 to reach an agreement with the Transition/Franchise Player — or risk losing the tag for the duration of the eventual long-term deal. Under the new agreement teams have until July 15.
  5. If either the NFLPA or the owners are unhappy with the updated CBA, they may elect to make it null and void after four (4) years.
If either the NFLPA or the owners are unhappy with the updated CBA, they may elect to make it null and void after four (4) years.
 
Courtesy of AskTheCommish.com.

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Tony Lombardi

About Tony Lombardi

Tony is 24×7 Networks, LLC’s founder (the parent of EutawStreetReport.com and RussellStreetReport.com) His work has been featured on various sports websites and he is a regular guest on 105.7 The Fan and he hosts “The Fanimal” also heard on 105.7 The Fan, Saturdays from 8-9AM. Among his favorite things in life are his wife, kids, family, friends, The Beatles, Breaking Bad, Gladiator, The Godfather, Guinness, orange crushes, meatballs and Key West, not necessarily in that order. Follow Tony on Twitter @RSRLombardi.

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