Guest Post: Shlynch Covers The Salary Cap

One of the things I take most pride in here at the IgglesBlog is how over the last three years we've managed to establish a commenting culture that -- with only a few exceptions -- has been consistently erudite and cordial.  It all breaks down when we start discussing Donovan McNabb, of course, but on the other days we end up with some pretty good discussions where the initial posts may not even provide a majority of the value.

Regular readers are very familiar with the commenting track record of shlynch, a Boston-based Eagles fan who is otherwise OK and who has, over the course of 331 comments dating back to last June, established himself as something of an expert in the League minutiae that constrains what teams can and cannot do. 

I asked shlynch if he'd be interested in writing one or more pieces on the Eagles' salary cap situation, given all the additional complexities we're seeing in the "last" capped year.  He graciously agreed and his contribution is below.

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As reported by ProFootballTalk.com, as of May 15, 2009, the Eagles had $23.1 million of salary cap space available. This number didn’t include the $947,000 per team increase in cap space that was subsequently added, so in fact, the Eagles have more like $24.0 million. The team has also spent a lot of money this off-season: Jason Peters, Stacy Andrews, Leonard Weaver, Ellis Hobbs and Sean Jones combine for 2009 cap numbers of over $25 million.

Sal Paolantonio recently took a look at the cap space at ESPN.com, which Derek previously discussed. While Paolantonio made a couple of poor assumptions (for instance, the Eagles are currently about $17 million over the spending minimum of $107 million, not $3 million under, because the Eagles team salary cap is about $20.2 million higher than the league-wide cap due to having rolled unused space from 2008 forward to 2009, a trick which didn’t change the team’s minimum salary), his general point is correct: we have a truckload of cap space available, the cap is about to expire, and the team should get as much value as they can out of that space this year.

So it is cap season. Let me apologize in advance to those who find this type of thing dull and esoteric. Derek will have more pretty charts for you soon, and Bounty will no doubt help you cover your screen with pretty unicorns. For the rest of you, here is my summary of where the Eagles stand today with respect to the cap, and why I think it still matters.

How much money do the Eagles really have available to spend?

The simple answer is to point to their current cap space, as Paolantonio did. The truth, however, is that the Eagles have less than that amount available for extensions. One reason is that until the 53-man roster cut down date, the cap only accounts for the top 51 contracts on the team. Because we don’t know for sure who the 53 players on the roster will be, not to mention players on PUP or IR, we can only approximate what the team’s true cap position in September will be. But set that aside for now.

There are five adjustments that need to be made to the current cap space to understand how much is truly available for extensions:

1. Brian Westbrook: In August 2008, Westbrook signed a big extension. People will remember, though, that it was really complicated. In fact, Joe Banner was quoted as saying, “It’s the most complicated contract I’ve ever seen…. There are extension years, potential voided years and escalators. Everything I’ve ever seen in a contract is in this deal.”

I believe that this is the contract that is going to trigger the $5 million cap charge that Dave Spadaro mentioned yesterday.

One of the key features of Westbrook’s deal is something called “superseding." If Westbrook met certain trivial incentives during the 2008 season, the Eagles got the right to supersede the remainder of his contract with a new one following the one year anniversary of his deal. As a result of this, his base salary for 2009 will increase from $4 million to $5.85 million, in addition to other adjustments in the terms of the deal for 2010-2013.

I also believe that subsequent to the superseding, there are provisions that will cause the last three years of the deal to void. If that happens this year – and I think it will – the part of Westbrook’s $6.5 million signing bonus that is prorated in each of the three voided years will accelerate and be charged in 2009, for an extra $3.25 million cap hit. Note that the current salary cap, as calculated by the league, reflects the deal before any superseding or any voiding, rather than the one that the Eagles are likely put in place in August. Result: -$5.1 million.

2. Dan Klecko:In 2008, the Eagles renegotiated Dan Klecko’s deal to include a phony $10 million “LTBE” incentive, which was designed to allow them to carry unused cap space from 2008 to 2009. However, because the deal extended from 2008 to 2009, and there are limitations on how much a player’s cap number can fall from one year to the next, they had to include an additional LTBE incentive of $4.3 million for 2009. This incentive is as bogus as the 2008 one was. In most years, that would allow the Eagles to roll $4.3 million of cap space into 2010, but because this is the last Capped Year of the current CBA, once that $4.3 million becomes officially “unearned”, the space will be added back to the current cap. Result: +$4.3 million.

3. Reggie Brown: Let’s face it: Barring injury to another wide receiver in the preseason, Reggie is unlikely to be on the team in September. That may come through a trade, or it may come by cutting him, but odds are he is gone. There will be a cap impact of doing so – but counter to typical logic, because this is a “use-it-or-lose-it” year for cap space, the Eagles would likely rather have the “dead money” count this year rather than have it sitting around in the future.

Brown’s current cap number for 2009 is $3.06 million. If he is cut, all of the remaining amounts of his signing bonus from 2006 and option bonus from 2007 that are scheduled to count through 2012 will now count in 2009. Thus, his cap number in 2009, if cut, will be $5.84 million. Result: -$2.8 million.

4. Rookies: The current cap doesn’t reflect the costs of signing the current rookie class. Estimating how much cap space these guys will take up in the end is a tricky business. First, while there is a rookie cap in place, the way it is calculated is it counts the base salaries and prorated bonus amounts for drafted rookies, plus prorated signing bonuses for undrafted rookies. A lot of those guys will be cut, and their base salaries won’t count but their whole signing bonus will count against the cap. Further, some of those guys could be placed on IR if they get “hurt," and the guys taken in later rounds have split salaries: they get paid less to be on IR than if they actually make the 53 man roster.

However, for these purposes, let’s just count the rookie cap in full, and assume that the whole amount hits the cap. Not precisely correct, but not too far off. Result: -$4.1 million.

5. “Rainy Day” fund: The Eagles always keep cap space available during the year to pay injury replacements. Those guys usually make the minimum, prorated for the time they are on the roster, but you never know who or when injuries will hit. Any unused amounts in this fund usually gets put into a LTBE and rolled over to the next year, but they won’t have the leeway to do that as much in 2009. Figure they keep – and probably even use – between $2 million and $3 million for this. Result: -$2-3 million.

Add those adjustments up, and that means that the Eagles have about $10 million, give or take, less cap space than it appears for extensions. Thus, the total amount available for extensions is “only” about $14 million.

Where did all that cap space come from?

Value investing: Let’s get this one out of the way. In the Andy Reid era, the Eagles have always focused on maximizing return on investment rather than maximizing spending. They would rather pay less for the same expected return. That manifests itself in policies against aging players, young guys signed to absurdly long early extensions, and all the other tools we are so familiar with in Philadelphia. You say they should spend more on free agents; they say that spending $1 million more wouldn’t give them players much better than the ones that they already have. Both arguments have merit, but love it or hate it, the value focus manifests itself in extra cap space.

LTBE loophole: For years, Joe Banner has been aggressive in using a loophole in the CBA that allows the Eagles to carry cap room that would have otherwise been left unspent from one season into the next. The first time I remember hearing about this strategy, it was with respect to Tim Hauck’s contract, so Banner has been using the loophole since at least 2001, and likely even earlier.

For those who aren’t familiar with how the loophole works, it revolves around incentive bonuses: if a player gets 5 sacks or has 4 TDs or 3 blocked kicks on special teams, they get a pre-defined bonus. Incentive bonuses in a player’s contract are classified according to rules set forth in the CBA. Those classifications are “Likely To Be Earned” (LTBE) and “Not Likely to be Earned” (NLTBE). LTBE bonuses count against the team’s salary cap in the year that they are scheduled to be earned, NLTBE bonuses do not. At the end of the season, the NFL calculates how much each team had set aside for LTBEs that weren’t earned – or said differently, it figures out how much was charged to the team’s cap that was not actually spent. Similarly, the NFL calculates the amount of incentives designated NLTBE that were actually earned. If the unearned LTBEs are greater than the earned NLTBEs, then the following year’s salary cap for that team is increased by the net amount. Similarly, if the earned NLTBEs exceed the unearned LTBEs, then the team’s cap for the following year is lowered by that amount.

But the mechanism is less important than the result: the Eagles have never “lost” any cap space since this trick has been used. If they have had cap space at the end of the season, they have rolled that forward into the following year. So one way to look at the current $24 million of cap space is that it is the cumulative total amount by which the Eagles have under-spent the cap since Banner started using the trick. Since I estimated that they will most likely be looking at $14 million by the time the season kicks off without any contract extensions, one interpretation of that figure could be that the Eagles have under-spent the cap by about $1.3 million per season during the Reid era.

Betting on the last CBA extension: Those who can remember back to February 2006 will remember that there was a situation that teams would get themselves into what was called "cap hell." Teams valued players (in general) at levels higher than the cap allowed them to spend. The cap was a true constraint, not just a guideline. Because of this, teams used large signing bonuses, which for cap purposes could be spread out over five or six years, and increasing salaries over the life of the deal to postpone the cap hits of players they wanted to sign. This is known as "back-loading," because the true cap hit was in the back end of the deal.

The problem was that teams couldn't postpone counting that deferred cap hit forever (though the Redskins tried hard to prove otherwise, and were quite brilliant at it, to he honest) and eventually, there was so much cap space tied up in money that had been spent in previous seasons – and often related to players already had been released – that teams didn't have enough room to spend new money on players. They were stuck with aging or poor-quality rosters, and had to wait until the backlog of dead money cycled its way through before they could start to reload.

The Eagles were always very careful about avoiding putting themselves in that situation. For one thing, they didn't spend money on aging players, who were more likely to see sharp declines in their ability and would result in wasted cap space; for another, they signed players to early extensions, so that their best players were tied up with below-market contracts. But just as important was the ability to roll cap space forward. This started when the Eagles had bad teams in the late 1990s, and the Eagles didn't have players good enough that they needed to max out their space. Later, when they got strong teams, they were able to spend that rolled forward money. The Eagles had about $4.5 million of LTBE rollovers from 2003 to 2004; they only rolled $1.4 million from 2004 to 2005, allowing them to invest in guys like Jevon Kearse and Terrell Owens in 2004 without subjecting themselves to potential cap hell. They were also very careful not to spend guaranteed money when they didn't have to – a strategy that helped lead to TO's meltdown in 2005.

Back to 2006: the Eagles had prepared for the league being forced into a massive cap hell that entering into the Last Capped Year under the old CBA would have caused. As I said previously, the Eagles rolled $1.4 million from 2004 to 2005; they rolled a (then) whopping $7.0 million into 2006. The Eagles had $16.7 million in cap space on March 2, prior to the CBA extension and prior to free agency; the rest of the league averaged $3.6 million. At that time, 24 teams had less cap space than the Eagles, and 12 of those were over the cap. Only 11 teams had cap space of more than $10 million prior to free agency; contrast that to today, three years later, where 19 teams have at least that amount as of this moment AFTER free agency.

Many teams in the league would not have been able to compete for the best players in free agency, due to limited cap space, and others would have had to make major cuts to get in compliance.

Once the CBA extension was finalized, every team in the league got another $6.5 million in cap space for 2006; as of March 10, 2006, which was post-CBA extension and pre-free agency, the Eagles had $26.1 million under the cap, the rest of the teams averaged $15.3 million and 23 teams had $10 million or more in space. The Eagles were no longer one of the only deep pockets in free agency, and a competitive advantage that had been anticipated and prepared for was lost.

So part of the reason that the Eagles have so much space now is that they had been so careful in the era when the cap was actually constraining. Once the cap was raised substantially in 2006, flexibility was no longer as crucial as it had been in previous years, and stopped being a competitive advantage. And the amount of cap space league-wide was so massive that, as Joe Banner would point out, the NFL couldn’t hope to spend it all.

Maximizing cap space since 2006: After the CBA was extended prior to the 2006 season, the Eagles signed many of their young players to big extensions. They used up a lot of cap space to do so: they “only” rolled $3.0 million from 2006 to 2007 despite the huge cap windfall from the new CBA. These extensions called for large roster bonuses in 2007. Roster bonuses count 100% against the cap in the year in which they are paid.

However, the Eagles had the right to convert these roster bonuses into option bonuses. Even though the player gets the check for the same amount of money on the same day regardless of what the bonus is called, for cap purposes, option bonuses are spread out over a period of five or six years.

The bonus payments in question totaled $17.5 million in 2007. The Eagles chose to convert them to option bonuses and spread them out against the cap. Thus, the option bonuses count $2.92 million per year from 2007-2012; had they keep them as roster bonuses, that payment would have counted $17.5 million in 2007, and nothing from 2008-2012. The benefit of the option bonus strategy is that it allows the team to have more flexibility in the early years to spend more money. The cost is that there is dead money against the cap, dead money that the pre-2006 Eagles would likely have avoided.

Thus, the Eagles have only counted half of those roster bonuses against the cap as of today. That choice alone accounts for $8.75 million of the team’s current cap space, and allowed the team to increase the amount of LTBE credits for the 2008 season to $14.1 million.

So what happens to all that cap space?

Because 2009 is the Last Capped Year under the CBA, there are certain provisions that come into place for the first time. One critical one is the closing of the LTBE loophole. As an incentive is earned, it counts against the cap. If it is not earned, it no longer counts against the cap. So it is a “use it or lose it” season. Any cap space left at the end of the season will disappear for good, even if the CBA is renegotiated prior to March 2010 and the cap remains in place for next year, because unless the renegotiation happens mid-season (highly unlikely) there will be no chance to insert new, phony LTBE provisions into player contracts once the season is over.

But here’s the thing: Yes, the cap expires this year. Yes, the future is uncertain. But I am willing to bet that virtually everybody on both sides of the negotiating table believes that 2011 will be capped under whatever new CBA is signed. And I would place even money that 2010 is also a capped year, thanks to a “shocking” last-minute agreement on a new CBA – there is nothing more misleading than the posturing that takes place during a negotiation for anything, and especially a labor negotiation.

As a result, that cap space in 2009 has value. The available cap space represents about $14 million of cash that could be spent in 2009 and that will not count against the cap in future years. If you believe that there is – or even that there only may be – a cap in the future, then there is, by definition, value in using the cap space we have before it disappears for good.

Joe Banner said earlier in the off-season, with respect to the team's cap space, that “you couldn’t spend it all.” But it wouldn’t be that hard. You just have to structure deals to have their cap hit closely resemble their cash expenditures.

For example, here’s how Stacy Andrews’ contract was done:

 

Note that in every single year, his cap number is 100% cash. He is only paid through roster bonuses and salary. It is not usually in the player’s best interest to agree to a deal like this, though. First, he can be cut at any time, which makes him less likely to see the later years of his deal as he ages. For a player like Donovan McNabb, this matters a great deal; he wants the security of knowing that he isn’t playing year to year. Second, he doesn’t have much guaranteed, as a percentage of the whole deal. If we are talking about an extension, the key is guaranteeing money, because the incentive for a young player to sign an early extension is to avoid injury risk. Andrews was willing to sign because he is already an injury risk and nobody would commit much guaranteed money to him. The Eagles’ extension candidates don’t fit that profile.

Another structure is one like Jason Peters’ new deal:

Note that he got more cash up front than his cap value – that provides the player job security, as it creates potential dead money. However, the cap hit is also large in 2009 and eats up cap space. This is the type of structure that I could see Donovan McNabb insisting upon.

Finally, consider Asante Samuel’s deal:

  

Samuel got a signing bonus and a pair of large roster bonuses. A young player might find this structure appealing for a lower signing bonus if the roster bonus in the second year is convertible to be an option bonus if the CBA is extended in 2010. That would allow the player to have some security in a capped system. The Eagles, of course, would want a deal that extended as long as possible to be able to prorate that option bonus, but it is questionable whether players will go along with a super-long term extension with this franchise any more.

I think the most notable thing about Samuel’s and Peters’ deals are that they hit the cap for $9.1 million and $12.7 million. Those were mega deals, ones which no other players on the roster will get in an extension. But we still have $14 million of cap space available. Even if we extend Donovan McNabb, Stewart Bradley and whomever else you want to extend – we have a lot of cap space to eat up. The one thing we know for sure is that the Eagles won’t extend players just to use up cap space – they will structure good deals for them in a way that is also good for the salary cap.