Introducing Commitment Index – Part 2

Introducing Commitment Index

Part 2:  The Trough Model and the Folly of “Matching Cash With Cap”

Part 1: The “Mortgaging the Future” Assertion

As has been well documented, the NFL salary cap is designed to be a “hard cap,” as opposed to the alternative option (such as in the case of the NBA) a “soft cap.” Even though a team may spend more actual money than the salary cap limit in any given season, the NFL cap is “hard” in that total cap charges cannot possibly exceed the salary cap. On the other hand, the NBA salary cap contains numerous “exceptions” that allow teams to compile cap charges that, in the aggregate, exceed the salary cap in a given year.

However, the more interesting distinction between the NFL salary cap and the NBA salary cap is not the characteristics of their vertical constraint characteristics – constraints on the amount of spending – but rather the characteristics of their horizontal constraint characteristics – constrains on the timing of the spending. The NBA salary cap operates under a “use it or lose it” regime in which each season’s salary cap spending is calculated independently of the salary cap spending of past and future seasons. On the other hand, the NFL salary cap operates under an uninhibited carry-forward regime in which unused cap room can be “rolled over” to the following season.[1]

[1] At one point in time, cap space could only be carried forward via a loophole in the Collective Bargaining Agreement, but under the current CBA the constraints on this practice have been removed.

To create a visual comparison, the NBA salary cap operates under a “Bucket Model.” Each season’s salary cap is a separate bucket. Each team can fill the bucket with water to the desired degree within the confines of the rules of the NBA CBA, but the next season’s bucket is completely separate from the previous season’s bucket. If the team finishes the season with room remaining in the bucket, it does not receive a bigger bucket the next season.

Because NFL salary cap room is freely transferable from one season to the next, the NFL salary cap operates under a “Trough Model.” Each team’s collective cap room over any given time period (5 years, 10 years, etc.) is one large trough, with the water flowing from one end to the other without any regard for the timing cutoffs in between. If water is siphoned off at the beginning of the trough, then that water will never make it to the end of the trough. But in the absence of such action, the water will continue to freely flow forward in time.

So while the bucket-like nature of the NBA salary cap causes cap dollars to be perishable assets, the trough-like nature of the NFL salary cap causes cap dollars to be enduring assets. Each cap dollar that is used in the present year is a cap dollar that could have been used in future years, but that will no longer be available by reason of its use in the present year.

However, the NFL salary cap regime also includes a wrinkle in the Trough Model in that teams have the opportunity to spend money in the current year that will not count against the cap until future years (i.e. signing bonus proration). A team with $1 million in cap room can spend $5 million by giving a player a $5 million signing bonus that is prorated over 5 years. The team has effectively borrowed $4 million in future cap room in order to pay the player the $5 million, creating $4 million in “cap debt.”

This practice has come to be frowned upon among many NFL stakeholders, and teams such as Tampa Bay, Jacksonville, and Oakland appear to have decided to cease all practice of the technique. NFL analyst Andrew Brandt frequently provides commentary representative of this strategy of “matching cash with cap” or “pay as you go”:

“As readers of this space know, my ideal cap management involves matching cap and cash spending, with no prorated bonus amounts pushed out to future years. Now my former colleague, Raiders general manager Reggie McKenzie—always a willing student of cap management—is practicing this conservative approach with his newfound wealth of cap room.

The Raiders’ most expensive free-agent signing, center Rodney Hudson, will receive $13 million in compensation this year with a cap number of— you guessed it—$13 million. From my point of view, this is a perfectly managed contract, loading a full cap amount into the first year. The Raiders should manage as many veteran contracts this way as possible. Future proration = future problems.”

            -Andrew Brandt (MMQB), 3/19/2015

Brandt (and others echoing similar sentiments) is applying the Mortgaging the Future Assertion to the practice of using signing bonuses and prorating the cap hits of the payment.  He utilizes a context-neutral rule that says:  If a team uses signing bonus proration, Then the team will have salary cap problems in the future.  There are times when this may be true, but as I explained in Part 1, non-nuanced use of the Mortgaging the Future Assertion often leads to inaccurate analysis within a specific context.

Returning to the previous example, a team with $1 million in cap room that pays a $5 million signing bonus has created $4 million in cap debt, and has therefore moved itself further along the continuum between 0% mortgaged and 100% mortgaged. This team would increase its mortgage relative to the other teams in the league, and in this case Brandt’s view seems accurate.

But if the team has $5 million in cap room, rather than $1 million, then paying a player a $5 million signing bonus and prorating the cap hits isn’t really any different than paying the player a $5 million roster bonus – as Brandt would encourage – that counts entirely in the present year. Because the Trough Model allows teams to carry cap room forward to future years, all the team has to do is “earmark” its $4 million remaining cap space to not be spent in the current year and instead rolled over to Year 2. In Year 2, the team then needs to earmark $3 million in cap space to roll forward, and so on. As long as the team had enough initial cap room to account for the entire signing bonus, and as long as the team is disciplined about earmarking cap room to carry forward throughout the duration of the contract, then the team never creates any cap debt. In that case, Brandt’s concerns are unwarranted.

Just as the Trough Model dictates that any cap dollar spent in the present year is a cap dollar no longer available in future years, the Trough Model also dictates that any cap dollar saved in the present year is a cap dollar that can be allocated to pay for the salary cap charge of a contract in a future year. And as I have written about in the past, this practice of prorating and earmarking provides an optionality benefit throughout the contract, rendering it a dominant strategy as compared to Brandt’s strategy.

However, what I think Brandt is implicitly asserting is that teams systematically fail to earmark enough cap room to avoid cap debt. The following tweet seems to capture that sentiment:

“Texans couldn’t resist temptation of JJ Watt contract. Converted $10M roster bonus to signing, pushed out $8M of Cap cost to future.”

            -Andrew Brandt (@adbrandt), 3/24/2015

As I have described, this transaction would only cause a problem if the Texans subsequently used the additional $8 million of cap space in the current year. If they don’t use it, then they can roll it forward and cover the future cap costs by earmarking.

It seems to me that if the assumption underlying Brandt’s tweet is correct, and teams systematically fail to earmark enough present year cap room to avoid cap debt, there could be three possible reasons for this phenomenon: (1) teams are completely ignorant of this concept, (2) teams are aware of this concept but lack any and all discipline due to impatience or other types of pressure, or (3) teams are aware of this concept but selectively choose to ignore it in instances where they see an opportunity for the present that they feel outweighs any potential harm to the future.

Explanations (1) and (2) may or may not be accurate, but in either case, there is nothing that can be done about it from the outside. But importantly, explanation (3) is not inherently a bad thing. Explanation (3) leads to a team moving further along the mortgage continuum, and therefore causing the team to mortgage its future relative to the other teams in the league. But in any given situation, deciding to mortgage the future may be an entirely reasonable decision to make.

However, if a team is going to consciously decide to mortgage its future by incurring cap debt by failing to earmark enough cap room to cover future signing bonus proration, it should at least do so knowing where such decision will leave it relative to the other teams in the league. In Part 3, I will introduce Commitment Index to accomplish this objective.

Bryce Johnston is the creator of Commitment Index and the co-creator of Expected Contract Value.  Bryce earned his Juris Doctor, magna cum laude, from Georgetown University Law Center in May 2014, and currently works as a corporate associate in the New York City office of an AmLaw 50 law firm. Before becoming a contributor to overthecap.com, Bryce operated eaglescap.com for 10 NFL offseasons, appearing multiple times on 610 WIP Sports Radio in Philadelphia as an NFL salary cap expert. Bryce can be contacted via e-mail at bryce.l.johnston@gmail.com or via Twitter @NFLCapAnalytics.

  • Werner

    Worth to be mentioned that 8′ Cap Debt is partly amortized via increasing overall Cap. 8′ borrowed this year take out 6% from a 133′ Cap number, but only 5.5% from next years 143′.

  • McGeorge

    >>So while the bucket-like nature of the NBA salary cap causes cap dollars to be perishable assets, the trough-like nature of the NFL salary cap causes cap dollars to be enduring assets. Each cap dollar that is used in the present year is a cap dollar that could have been used in future years, but that will no longer be available by reason of its use in the present year.

    This is why I get mad when GMs sign so-so players to big contracts , like teh jets just did.

    “We’ll we had the room” they will say. Well, no, you consumed that money now, that could have been used in the future, on a better player.

    • GhostofBrowningNagle

      to be fair, i think the jets really HAD to spend this season due to whatever rule that says you have to spend 95% of the cap in any 4 year period or whatever, right?

      • eddiea

        I think they were okay,with the Spending Floor, they just spent to be spending. Which might show, no matter who the GM is he’ll still spend on the wrong player. That extra money,imo,should’ve gone to Wilkerson unless he really isn’t in their future plans.

      • McGeorge

        The Jets were forced to spend a huge amount, but they went beyond that.
        The beyond part bothers me because the Jets with Geno Smith aren’t going anywhere. Don’t use up future cap money for a chance to improve form 7-9 to 8-8. Concentrate on rebuilding, save the extra money for future players.

      • PerfectTrader777

        Is this an actual rule?

  • RegisHawk

    Another example is the Cowboys’ executing a similar clause for Tony Romo’s contract to convert base to bonus in order to free up cap room for the current year. After having done so for 3 years running, this is creating undue stress on future years’ cap limits that they appear to be hoping will be alleviated as the Salary Cap increases annually.

    Other than that, I think a canal/lock or sluice-gate analogy would have been more apt as a description of the NFL Salary Cap process.