We take a basic look at the minimum cash spend requirement per the Collective Bargaining Agreement.
It's hard to believe that the upcoming 2013 NFL season will mark the third year under the "new" Collective Bargaining Agreement executed between the NFL and the NFLPA in the summer of 2011. It seems like just yesterday that the owners and players were involved in heated negotiations and contentious legal battles involving such obscure legal doctrines as the Norris-LaGuardia Act. Thankfully, those days are behind us and it's been "Back to Football" ever since.
While the new CBA contained many provisions previously unseen in the NFL world, such as a rookie wage scale and mandatory 4-year contracts for drafted rookies (to name just a few), one of the biggest and most talked about change was the requirement that each NFL club spend a certain amount of money beginning in the 2013 season. Officially known as the "Minimum Team Cash Spending" provision, beginning with the upcoming 2013 season, each club will be required to spend, in cash, a certain percentage of the established salary cap during the remaining 8 years of the CBA (equally divided into two, 4-year periods).
Specifically, over the next four seasons (2013, 2014, 2015, 2016), each team will be required to spend, at a minimum, 89% IN CASH of the salary cap over that 4-year period. By way of example, if the salary cap for the next 4 seasons is $120M, $125M, $130M, and $140M ($515M total), each club is required to spend $458.35M (i.e. 89%) in cash over that 4-year period. The same applies for the final 4 seasons under the current CBA (2017, 2018, 2019, 2020). With this in mind, it becomes important to understand what a "Cash Spend" means under the CBA.
"Cash Spend" vs. "Cap Hit"
There are two variables at play under the Minimum Team Cash Spending requirement. The first variable is that an 89% threshold requirement must be satisfied. The second variable is that this 89% threshold must represent a "Cash Spend", as opposed to merely having a cap figure (or "Cap Hit") of 89% of the salary cap.
What does it mean to have a "Cash Spend" under the CBA?
"Cash Spend" and "Cap Hit" differences generally come into play whenever a player receives compensation in a form other than his Base Salary. Aside from a player’s Base Salary, other forms of compensation include signing bonuses, roster bonuses, reporting bonuses, workout bonuses, option bonuses, salary advances, and many others. For the sake of simplicity, the scope of this article deals only with signing bonuses.
To help illustrate the difference between "Cash Spend" vs. "Cap Hit", let's use a real life example of a current NFL player's contract - San Diego Chargers Pro Bowl Safety Eric Weddle. Weddle’s contract is a great example to use because it contains only a signing bonus, and does not contain roster, reporting, workout, or other bonuses.
In 2011, the Chargers re-signed Weddle to a 5-year/$40M contract, which included a $13M signing bonus and $19M guaranteed.
As an initial matter, it is important to note that the amount of the signing bonus is INCLUDED as part of the contract’s overall value. It is often mistakenly thought that the value of the signing bonus is added to the contract’s overall value. Under this misguided belief, many would think that the overall value of Weddle’s contract would be $53M ($13M + $40M). This is not the case. The signing bonus is NOT in addition to the overall value of the contract. Rather, the signing bonus is INCLUDED in the overall value of the contract. As such, the $13M signing bonus is INCLUDED in the $40M figure.
Secondly, it is important to note that the annual Cap Hit and Cash Spend is rarely calculated by simply dividing the overall value of the contract by the years of the contract. In other words, it will often be asserted (erroneously) that Eric Weddle’s contract accounts for an annual Cap Hit and Cash Spend of $8M ($40M/5 years). Due to the intricacies of the Salary Cap accounting rules, this is rarely the case.
|Eric Weddle's five-year deal worth $40 million, including a $13 million signing bonus and $19 million guaranteed (Source: Spotrac.com)|
|Year||Season||Base||Signing Bonus Proration||Cap Hit (base + signing bonus)||Cash Spend|
|1||2011||$1 Million||$2.6 Million||$3.6 Million||$14 Million ($1 million base + one-time payment of $13 million signing bonus)|
|2||2012||$5 Million||$2.6 Million||$7.6 Million||$5 Million|
|3||2013||$6 Million||$2.6 Million||$8.6 Million||$6 Million|
|4||2014||$7.5 Million||$2.6 Million||$10.1 Million||$7.5 Million|
|5||2015||$7.5 Million||$2.6 Million||$10.1 Million||$7.5 Million|
|$27 Million||$13 Million|
For purposes of the new 89% Cash Spend Requirement, all that matters is the "Cash Spend" column, not the "Cap Hit" column. For the 2013 season, the Cash Spend for Eric Weddle’s contract would be $6M. Thus, this $6M "Cash Spend" figure would count toward the 89% Cash Spend requirement, even though the 2013 Cap Hit = $8.6M.
When calculating the "Cash Spend", a signing bonus represents a "Cash Spend" ONLY in the year in which it was actually paid to the player. On the other hand, when calculating a "Cap Hit", the entire amount of the signing bonus can be prorated over a maximum of five years of a contract. In other words, since signing bonuses can be prorated over the life of a contract (maximum of 5 years), the prorated portion of the signing bonus will represent part of a "Cap Hit" in future years of the contract, even though the amount of the prorated portion of the signing bonus does NOT represent part of a "Cash Spend" in those future years because the prorated portion was not actually paid to the player during those seasons.
Looking at the above table, therefore, the $13M signing bonus represents a "Cash Spend" for the 2011 league year ONLY. However, when calculating the "Cap Hit", the $13M signing bonus is allowed to be prorated over the course of the entire 5-year contract. The proration occurs on a straight-line basis: $13M/5 years = $2.6M. Thus, the $2.6M prorated amount represents a Cap Hit in each of the 5 years of the contract. In order to determine the total "Cash Spend" on Eric Weddle for the 2011 season, the Cash Spend of the signing bonus ($13M) must be added to the Cash Spend of the Base Salary ($1M). On the other hand, in order to determine the total "Cap Hit" on Eric Weddle for the 2011 season, the 2011 Base Salary ($1M) is added to the prorated portion of the signing bonus ($2.6M). The results are as follows:
The total 2011 Cash Spend for Eric Weddle = $14M ($1M Base Salary + $13M Signing Bonus).
The 2011 Cap Hit on Eric Weddle = $3.6M ($1M Base Salary + $2.6M pro-rated portion of Signing Bonus).
If a contract does not include any bonuses (e.g. signing, roster, reporting, workout, option, etc.), then the player is paid only in the form of a Base Salary. In these instances, the player’s Base Salary represents both the Cash Spend and the Cap Hit.
The take away message from the above table is that offering substantial signing bonuses is one way to more easily achieve the 89% Cash Spend requirement, since signing bonuses represent an immediate "Cash Spend". It is a sure-fire way to ensure that cash is being spent in accordance with the new Cash Spending requirement. If Eric Weddle’s contract were to be executed during this upcoming 2013 offseason, the $13M signing bonus would go a long way toward achieving the 89% Cash Spend threshold. However, signing bonuses also represent a double-edged sword for teams. This is because if a contract containing a large signing bonus is terminated before the end of the contract term, the unamortized portion of the prorated signing bonus is accelerated and counts against the team’s salary cap (either immediately if the termination occurs on or before June 1st, or immediately and for the following season if the termination occurs after June 1st and the contract has more than one remaining season with a prorated signing bonus).
For teams with proven, young players still performing under their modest rookie contracts, offering substantial signing bonuses as part of a contract extension is one way to more readily achieve the required 89% threshold spending, even though the team may otherwise appear to be inactive during Free Agency. Fans of these teams may be wondering, "But I thought they had to spend money!?!". Yes, each team must spend 89% of the Salary Cap in Cash over the course of the next four (4) seasons, and a couple of large signing bonuses doled out in each of these seasons can go a long way toward achieving the required 89% cash spending threshold.
Even though the 89% Minimum Cash Spend requirement is over a 4-year rolling average, teams would be wise to spend at, or close to, the required threshold in order to avoid having to over-compensate during the 3 seasons following the 2013 season. As such, with the Salary Cap for the 2013 season expected to be ~ $121.5M, each team would be wise to have a "Cash Spend" of ~$108M (89% of $121.M), or close enough thereto, for the 2013 season.
Therefore, when the free agent signings commence on March 12th (and before then for players re-signed by clubs who held their rights the prior year), pay attention to the any and all signing bonus amounts, as this will indicate an immediate "Cash Spend" for the team.
Carry-Over Cap Room:
Having discussed the intricacies of the Minimum Team Cash Spending requirement, another provision of the CBA addresses the new Salary Cap "Carry Over" room concept. Pursuant to Article 13, Section 6, subsection (b)(v) of the CBA ("Carrying Over Room"):
(v) A Club may "carry over" Room from one League Year to the following League Year by submitting notice in writing signed by the owner to the NFL no later than fourteen (14) days prior to the start of the next League Year indicating the maximum amount of Room that the Club wishes to carry over. The NFL shall promptly provide a copy of any such notice to the NFLPA. The amount of Room carried over will be adjusted downward based on the final Room available after the year-end reconciliation.
As discussed above, each Club is required to have a "Cash Spend" of 89% of the Salary Cap over the next two, 4-year periods which will run through the expiration of the current CBA.
An interesting question arises if a club decides to carry over cap room from one season to the next. Essentially, does the 89% Cash Spend threshold apply to the League Salary Cap (i.e. the "unadjusted cap"), or to the team’s new "adjusted" salary cap which would include any additional carry over amount? For example, if a team is $10M under the salary Cap during the upcoming 2013 season, and decides to carry over the entire $10M Cap room into the 2014 season, is the 89% requirement calculated from the league’s salary cap, or from the team’s adjusted cap?
The relevant section of the CBA provides as follows (emphasis added):
Section 9. Minimum Team Cash Spending:
(a) For each of the following four-League Year periods, 2013–2016 and 2017–2020, there shall be a guaranteed Minimum Team Cash Spending of 89% of the Salary Caps for such periods (e.g., if the Salary Caps for the 2013–16 and 2017–2020 are $100, 120, 130, and 150 million, respectively, each Club shall have a Minimum Team Cash Spending for that period of $445 million (89% of $500 million)).
From the language of the CBA, it is clear that the 89% Minimum Team Cash Spending applies only to the league’s cap (i.e. the "unadjusted cap"). The CBA makes no mention that the team must spend 89% of the salary cap as adjusted for each team pursuant to any carry over amount made by such team. Rather, the provision simply, and unequivocally, states, ". . . Salary Caps for such periods".
This means that whatever the league Salary Cap is (believed to be approximately $121.5M the upcoming 2013 season), a team must spend 89% of that League Cap. It is plain that the 89% Minimum Team Cash Spending threshold is calculated prior to any Carry Over amount, and is, therefore, applicable only to the "unadjusted" league salary cap.
Finally, each team is allowed to carry over cap room year after year, until the end of the current CBA, which runs through the 2020 season. While the Carry Over room does NOT affect how the 89% Minimum Cash Spend threshold is calculated, it does provide a clever, new tool giving teams more Cap Room in which to sign players while still operating within the Salary Cap. Teams with a successful track record of managing the Salary Cap will undoubtedly utilize this new Carry Over rule in order to take full advantage of the Salary Cap. As such, these teams that are able to carefully and successfully manage the new Carry Over rule will be less likely to be forced into making painful salary cap-related roster purges.
The NFL calendar offers no room for rest for front office personnel. While seven months remain before the start of the 2013 regular season, each team is already at work gearing up for an always busy, intriguing, and above all, exciting offseason. With new CBA rules going into effect this season, it will be interesting to see the approach teams take as they prepare and upgrade their rosters in an effort to hoist the Lombardi Trophy this time next year.