Making Sense Of Dollars: A Salary Cap Primer Applied To Your Houston Texans

"So, then, his shoes were all like 'Pay Me, Rick.' And I was like, 'LOL. NO.' Good times."

Depending on where you look on them internets, you can find salary-cap estimates for the Texans anywhere from $3M under to $25M under (see also here), with a bunch of other estimates thrown in. While there might be different ways of looking at these things --- glass-half-full versus glass-half-empty versus who-drank-half-my-beer?!? --- these numbers cannot all be correct. More to the point, having such a wide range of numbers out there makes conversations here difficult, especially when some people seemingly don't entire understand the rationale behind the numbers they are citing.

So, as Part 2 in my Quixotic quest to get everyone on the same page, I figured it couldn't hurt to take a comprehensive look at the salary cap under the new Collective Bargaining Agreement ("CBA"), then apply that information to the Texans (to the extent we can find the numbers). It won't be perfect, but I think we can get pretty close.

What are you waiting for? This jump is much easier than the penultimate jump in the Airships level of World 8 in Super Mario Bros. 3!

Part 1

"Money Itself Isn't Lost Or Made; It's Simply Transferred From One Perception To Another." --Gordon Gekko

Oh, Lord . . . I Know That Look. You're Going To Do Both Sides Of A Q&A Again, Aren't You? To borrow a line from O-Dog, "You KNOW IT!"

Fine. What Can You Tell Me About The Nuts And Bolts Of The Salary Cap? Simply put, the salary cap is calculated based on income that the league is projected to earn during a League Year ("LY"). A long time ago, the cap was based on a relatively limited pool of money, known as Defined Gross Revenue ("DGR"), that was basically national TV contracts, merchandising, and ticket sales. In 2006 (i.e. the previous CBA), this pool was expanded slightly, and it was expanded yet again under the new CBA. Currently, this pool is known as All Revenues ("AR"), and it includes more or less all revenue that can classified as "Media," "NFL Venture/Postseason," or "Local" (which is basically revenue from preseason games).1

The calculation for the cap under the new CBA works like this:

(1) Projected AR x Defined CBA% = Player Cost Amount ("PCA"). The Defined CBA% (for the players) breaks down as follows: 55% of AR classified as "Media," 45% of AR classified as "NFL Venture/Postseason," and 40% of AR classified as "Local." Total, the players received between 47% and 48.5% of AR (capped at 48% for 2012-2014, and capped at 48.5% for 2015-2020).

(2) PCA - Projected League-Wide Benefits (defined in the CBA) = Player Salary Amount ("PSA").

(3) PSA/32 = Unadjusted Per-Team Salary Cap.

Using the above calculations for 2011, the PCA was $4,556,800,000, the PSA was $3,852,000,000, and the Unadjusted Per-Team Salary Cap was $120,375,000. According to pretty much every source I can locate, the salary cap for 2012 should be the same amount. That said, there's a Florio rumor that the NFL and the NFLPA are trying to increase the cap for 2012.

So, The Salary Cap In 2011 And 2012 Was/Is $120,375,000? Well, not really. You see, in addition to the Unadjusted Cap Number, in 2011 teams were allowed to designate three players who each had at least five accrued seasons and made at least $1M more than the minimum salary for their level of experience. For each of these players, the team could take a $1M cap credit to be repaid evenly over the 2014-2017 league years.

In 2012, teams are allowed to designate three players meeting the same criteria and take a $500,000 cap credit for each player with the same repayment schedule. So, even if Florio is wrong (or, more accurately, if the cap is not raised in some manner), the cap will be at least $1.5M higher than the "official" number set by the league.

Is There A Minimum Salary? Well, for 2012, the answer to this question is a resounding "sorta." You see, the much-mentioned salary floor in the new CBA does not kick in a per-team basis until the 2013 League Year. At the same time, there is a requirement that the 32 teams collectively spend 99% of the PSA in 2011 and 2012. In 2013, that requirement drops to 95% for each of the four-year periods of 2013-2016 and 2017-2020, and each team is required to spend at least 89% of the Unadjusted Per-Team Salary Cap in each year.

Long story short, there is no per-term minimum salary in 2012. There is a rather convoluted one beginning in 2013 and stretching through 2020.

Hmm . . . And What Counts As "Salary"? Per the CBA (emphases mine):

(a) "Salary" means the compensation in money, property, investments, loans or anything else of value to which an NFL player (including Rookie and Veteran players and players whose contracts have been terminated) or his Player Affiliate is entitled in accordance with a Player Contract, but not including Benefits. Salary with respect to any period shall include all Salary actually payable with respect to such period under the terms of a Player Contract and all Salary attributable to such period under the terms of this Agreement.

(b) A player’s Salary shall also include any and all consideration received by the player or his Player Affiliate from a Club or Club Affiliate, even if such consideration is ostensibly paid to the player for services other than football playing services, if the NFL can demonstrate before the Impartial Arbitrator that the consideration paid to the player or Player Affiliate for such nonfootball services does not represent a reasonable approximation of the fair market value of such services as performed by such player. The Impartial Arbitrator’s determination may take into account, among other things: (1) any actual dollar amounts the player or Player Affiliate received for similar nonfootball playing services from an independent third party; and (2) the percentage of total compensation for nonfootball services received from third parties versus the Team or Team Affiliate

Zuh? Anything of value that a team gives a player, not counting benefits.

But Salaries Are Not Guaranteed, Right? Some are; some aren't. A contract, like what we saw with Arian Foster's new deal, will specify what portion of the total amount is guaranteed. This distinction matters only if/when a team wants to release a player who is under contract. In that situation, the remaining guaranteed money is a cap hit, but the non-guaranteed portion is not. That's why so many contracts are backloaded with numbers that appear to be huge but rarely (unless your name is Mario Williams) actually have any impact on the cap.

Well, What's This I've Heard About Teams Being Able To Carry Over Unused Cap Space? Under the new CBA, a team may "carry over" cap space from one League Year to the following League Year by submitting notice in writing 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

Oh. Ok. And What Combined Salaries Have To Be Less Than Or Equal To The Cap? During the offseason, the top 51 salaries have to be less than the cap limit. (Sorta.) This is how teams can carry 80 players during the preseason. As of the start of the regular season, however, the 53 players on the roster, plus any "dead money," must combine to be less than or equal to the cap limit.

"Dead Money"? Salary-cap hits for players no longer with the team. When a player is cut, the pro-rated balance of his guaranteed money (including signing bonus) becomes due; if he's designated as a June 1 cut, the balance is spread over two seasons (the annual amount due in the year the player is cut, with the remainder due the following year), while guys not designated as June 1 cuts have the entire balance due against the cap that season.

Anyway, we'll come back to dead money in a bit.

Why? Where Are We Going? (And, I Swear To God, If You Say "Infinity And Beyond," I'll Burn This Place To The Ground.) Duly noted. That's not where we're going, anyway. Instead, I want to go back to the idea that the top 51 salaries are what count for salary cap purposes during the offseason and preseason. (Sorta.)

It works like this:

  • For players currently under contract, the specified salary for a given year, plus any amortized portions of signing (or other) bonuses, is totaled up.
  • All Exclusive Rights Free Agents tenders are included.
  • RFA tenders are included unless and until they are withdrawn, replaced by a June 1 or June 15 tender, or the RFA signs a new multi-year contract with the team.
  • All offer sheets extended to UFAs are included unless and until they are withdrawn or replaced by a June 1 tender.
  • All drafted rookies are assigned values equal to the minimum active salary for a player with 0 years of service until those players are signed or their rights are relinquished by the drafting team.
  • Finally, it's worth mentioning that all practice squad contracts count in this calculation, subject to a few caveats for teams who sign players away from other teams' practice squads. (See Art. 33, Sec. 5 of the new CBA if you're interested.)

OK, I'll Bite: What's With The "(Sorta)" That You've Used Twice? Not much, actually. It's just that the Top 51 rule for offseason/preseason isn't 100% set in stone. In addition to the 51 highest salaries, a team also has to count the portions of other contracts outside the top 51 that exceeds the minimum Active/Inactive salary for Undrafted Rookie Free Agents and any amount that exceeds twice the applicable minimum Active/Inactive List Salary for all other players.

That's Woefully Esoteric Discussion Right There. Thanks?

Let's Talk About Something More Concrete: Signing Bonuses. Right. So, signing bonuses are (obviously) factored into the salary for purposes of the cap. For purposes of the salary cap, all of the following are considered "signing bonuses": (1) Any amount specifically described in a contract as a signing bonus; (2) Any guaranteed reporting bonus; (3) Any consideration, when paid, or guaranteed, for option years, contract extensions, contract modifications, or individually negotiated rights of first refusal; (4) Any option exercise fee or bonus, subject to the rule set forth in Section 7(c), and any option buyout amount, when paid or guaranteed; (5) The difference between the salary in the second contract year and the first contract year when salary in the second contract year is less than half the salary called for in the first year of such Contract; (6) Any reporting bonus in the season of signing when a contract is signed after the start of training camp; (7) Any roster bonus in the season of signing when a contract is signed after the last preseason game; (8) Any salary advance paid on a guaranteed basis; (9) Any guaranteed bonus tied to workouts; (10) Any salary advance which a player is not obligated to repay; (11) Any amount of a Salary advance, offseason workout bonus, offseason roster bonus, or offseason reporting bonus that is guaranteed for skill, injury and Salary Cap terminations; (12) In a contract (or any renegotiation or extension of a contract that is executed in the Final League Year, each of the following, if it is to be earned or paid to the player in the season following the Final League Year: (a) any Salary advance which the player is not and cannot be obligated to repay; (b) any offseason workout bonus that is contingent upon the player’s participation in less than half of the Club's offseason workout program; (c) any offseason roster bonus; and (d) any offseason reporting bonus; (13) Any bonus to be paid to a player solely for fulfilling his obligations to play under his Player Contract without seeking to renegotiate and/or "holding out" (i.e., a "completion bonus"), and which bonus is otherwise guaranteed for skill and injury, except that the amount of any such completion bonus shall be calculated at its present value, computed using the Discount Rate; (14) Any relocation bonus which is individually negotiated between a player and a teams; and (15) Any increase in a player’s Salary for the current League Year that occurs as a result of the renegotiation or extension of the player's contract in that League Year, if the NFL does not receive notice of the salary terms of such an executed extended or renegotiated contract prior to 4:00pm (New York Time) on the Monday of the tenth week of the regular season.

Notwithstanding the above provisions or anything else in this Agreement, but subject to Section 6(d), any guaranteed salary in a contract, including but not limited to renegotiations or extensions of pre-existing contracts, will not be treated as a signing bonus solely on the basis of the guarantee.

Wow, That's A Lot Of Stuff! I know!

But How Does That Affect The Salary Cap? Well, while the player actually receives much of the money in the first year of the contract (hence, "signing" bonus), the bonus does not hit the cap all at once. For contracts of five years or less, the signing bonus is spread evenly over the years in the deal. Additionally, any year of a contract that is voidable by a player through events solely under his control are not considered seasons for purposes of prorating a signing bonus.

In an effort to limit circumvention of the cap by making absurdly long contracts with giant signing bonuses, however, these bonuses can only be prorated over a five year period; a player who signs a seven-year deal with a $20M signing bonus will have the same yearly cap hit for the first five years(vis-a-vis the signing bonus) as a player who gets the same bonus on a five-year contract.

What About Incentives? There are three types of performance-related incentives: individual incentives, team-related incentives, and incentives tied to the winning (or place among the final voting for) an honor from the NFL or "Recognized Media." The CBA spells out exactly which statistics/awards are acceptable triggers for incentives. (See pages 99-100 of the CBA.) No category/award that is not listed in the CBA is allowed as an incentive trigger.

Team incentives are agreements to pay a player $X if the team collectively does Y. A player whose primary position is on offense may not have incentives for defensive statistics (or special teams) unless that player played at least 15% of the team's defensive (or special teams) snaps in the prior season. Similarly, a player whose primary position is on the defense may not have incentives tied to the offense (or special teams) unless he played at least 15% of the team's offensive (or special teams) snaps in the prior season. The following team-based incentives are available to any player, regardless of primary position:

-Total Wins
-Making the Playoffs
-Reaching (or Winning) the Conference Championship
-Reaching (or Winning) the Super Bowl
-Total Touchdowns on returns and recoveries
-Net difference takeaways/giveaway

Finally, honor-based awards allow incentives for awards from the NFL or from the following Recognized Media:

-Associated Press
-Sports Illustrated
-Pro Football Weekly
-Pro Football Writers of America
-The Sporting News

Are Incentives Included In The Salary Cap? That all depends on whether they are classified as "likely to be earned" (LTBE) or "not likely to be earned" (NLTBE). LTBE incentives count against the salary cap. For the most part, the distinction is based on the previous season.

For individual incentives, any incentive that is equal to or less than the player's performance in that statistic in the previous league year is LTBE. Any individual incentive in Year 1 of a rookie contract is LTBE. For veteran players who did not play in the prior season, if the NFLPA and the NFL cannot agree on whether an individual incentive is LTBE, then an independent arbitrator will make the determination.

Team-based incentives are automatically LTBE if they are at or below the level achieved by the fifth-worst team in that category in the previous season. They are also automatically LTBE if the team achieved that particular level the previous season. (The converse of both of the preceding statements is also true.) Any team incentive based on the team's ranking in its division is automatically LTBE.

Any incentive bonus that is stated in terms of a per-play or per-game occurrence is automatically LTBE to the extent the specified performance was achieved by the player (if an individual incentive) or by the team (if a team incentive) in the previous year. (xx) Any incentive bonus to a kicker or punter for leading his team in any kicking or punting category is automatically LTBE. Preseason roster bonuses are always LTBE.

Other than in the Final League Year, if more than eight different team-performance incentives are included in a veteran's contract, all but the eight incentives with the lowest dollar value automatically will be deemed LTBE. In situations where multiple team-performance incentives are included in a contract, each category (in whole or in part) is considered a separate incentive unless the categories are purely conjunctive in phrasing (e.g., if the contract provides an incentive if the team does X and Y, that is considered a single incentive).

I Assume That Rookie Contracts Are A Little Different. Yeah, good guess. The CBA has an entire Article devoted to rookie contracts (Article 7). Article 7 creates a league-wide Total Rookie Compensation Pool, which is "a league-wide limit on the total amount of Rookie Salary for which all Clubs may contract with Drafted and Undrafted Rookies over the entire term of such Rookie Contracts." It also creates a Year-One Rookie Compensation Pool, which is "League-wide limit on the total amount of Year-One Rookie Salary for which all Clubs may contract with Drafted Rookies and Undrafted Rookies in the first year of such Rookie Contracts."

On a per-club basis, Article 7 establishes a Total Rookie Allocation, which means, "for each Club, its proportional share of the Total Rookie Compensation Pool, calculated based upon the number, round and position of the Club’s selection choices in the Draft, plus the Undrafted Rookie Reservation (as defined in Subsection (i))." The sum of the Total Rookie Allocations for all teams must equal the Total Rookie Compensation Pool. Similarly, each club has a Year-One Rookie Allocation, which I am guessing you can figure out the meaning of. Article 7 also provides a minimum allocation for each drafted player.

Now, here's where it gets tricky (or sketchy, if you are the type who thinks that the NFL is far too secretive about stuff): each drafted player is subject to a predefined Year-One Formula Allotment. This allotment is a fraction of the Year-One Rookie Compensation Pool, and it is based upon the player’s round and position in the draft and expressed as a percentage of the Year-One Rookie Compensation Pool (excluding compensatory selections and one-third of the Undrafted Rookie Reservation). Problem is, only the NFL and the NFLPA get to know exactly what the formula is; Article 7 explicitly prohibits disclosure of the formula to the teams, the players, player agents, or the public.

For 2011, the Total Rookie Compensation Pool was $874.5M and the Year-One Rookie Compensation Pool was $159M.

Now We Know What Is Counted And When, But How Is The Cap Hit Figured On A Contract? Stated very, very simply, the formula is:

Contracted salary amount for a given year (including any LTBE incentives) + applicable amortized portion of signing bonus + any bonus for that given season that is not included in the signing bonus.

That Seems Simple Enough. It is, in theory. The problem is that teams rarely, if ever, divulge all of the information that you need to make these calculations, so you're left cobbling together best-guesses from various sources. At present, the best version seems to be Spotrac, though some of their details seem slightly out of date, especially in terms of contracts that have been restructured.

Part 2

We gotta get jobs. Then we get the khakis. Then we get the chicks.

Knowing what we all now know, it would seem that we can paint a fairly decent picture of the Texans' actual salary-cap situation, right? Right. So let's do that. We'll work under the assumption that the salary cap is going to be $120,375,000, and we'll show our work throughout.

[updated: 5:26pm] Last things first, dead money. Due in large part to the timing of the new CBA, 2011 had a weird one-time clause that pushed all dead money from 2011 to 2012. This was great for 2011 purposes, but not so much for 2012, and the Texans are on the hook for $7,860,000 in dead money. This is primarily composed of cap hits for David Anderson ($1,440,000), Dan Orlovsky ($2,650,000), Amobi Okoye ($3,615,000), and Steve Slaton ($550,000). jtv_3 rightly pointed out in the comments that there's no way these dead-money totals (found here originally) can be right. Rechecking the contracts in question, and accounting for the fact that I can't find good details on how Amobi Okoye's original deal was structured, I think the dead-money total is far closer to $4,000,000. We'll call it $4,500,000 to be safe.

$120,375,000 - $4,500,000 = $115,875,000

Next off, carry-over. The Texans ended the 2011 season with $866,564 in cap room. Pursuant to Article 2, section 5, we round this to the nearest thousand. Then we can add it back in.

$115,875,000 + $867,000 = $116,742,000

Then we've got to take the Year-One Rookie Allocation off the top of our cap number to hold in reserve for the draft picks. Because we're assuming the cap is unchanged for 2012, the Year-One Rookie Compensation Pool should be similarly unchanged at $159M. Now, in actuality, a team with the first pick in each round is going to have a higher Year-One Rookie Allocation than a team with the last pick in each round. That said, we can make a conservative guess in the Texans' case and pretend like any team with all seven of its draft picks will get a 1/32 share of the pool. (I call this conservative because it will be artificially high by some amount, which will serve us better in seeing how the existing contracts and possible free agents can fit under the remaining dollars.) Our Year-One Allotment is therefore $4,969,000. Plus we need to include the $75,000 reserve for bonuses to any signed UDFA players.

$116,742,000 - $5,044,000 = $111,698,000

Turning then to Spotrac for the Texans' contracts, our initial total of their projected cap hits for 2012 is $104,801,000 (rounded), which would leave the Texans with $4,612,000 in cap space. However, this number is likely incorrect for two reasons. First, it does not include Jon Weeks' contract that he signed yesterday, which, given that he was an exclusive rights free agent, we can guess was probably for the ERFA tender amount of $540,000.

Second, and far more importantly, you might recall that Andre Johnson, Antonio Smith, and DeMeco Ryans all restructured their contracts last season to help the Texans get under the salary cap. Spotrac does not account for this, and the three of them are projected to combine for over $24M in cap hits. Unfortunately, I can't find any details on the restructuring, aside from the fact that the Texans were $3.25M over the cap prior to the new contracts and $2.6M under the cap after.

[updated 5:36pm] Now, normally, restructuring deals only kicks the can down the road slightly. However, it is probably safe to assume that the Texans did not do a restructure that would haunt them only one year later. At least I hope not. So, for the sake of being conservative (again), let's assume that the restructured deals will save the Texans half as much in 2012 and they did in 2011, or roughly $4.425M. I think Nash is right that my $4.425M estimate here is still too generous. I'm halving it again, just to be safe.

$111,698,000 - ($104,801,000 + $540,000 - $2,213,000) = $8,570,000.

That, then, is about as close to a final answer as we can get in terms of how much cap room the Texans have as of this moment. Obviously, we made a number of assumptions in there, so there's certainly a margin of error in all of this. All the same, it's the only analysis I've seen so far that tries to account for both dead money and the rookie pool, and does so in a way that makes sense.

The good news is that the Texans could create additional cap space by cutting some players. So, starting with our $8,570,000 number, lets factor in savings through two cuts:

Matt Leinart: Due $3M in 2012, his contract was 2 years / $5.5M, with $3.75M guaranteed. He was paid $2.5M last year, leaving $1.25M guaranteed salary to be paid. Cutting him would therefore save $1.75M in cap space.

Jacoby Jones: Jones' deal was 3 years / $10.5M with a $450K signing bonus and $3M guaranteed. The salaries in the deal were structured oddly, however, such that Jones was paid a base salary of only $467,280 last year, leaving $2,532,720 in guaranteed cash due. His salary in 2012 is $4,791,000. He's a perfect candidate for a June 1 cut, actually, which would allow the Texans to save $3,641,000 in 2012 and roll over about $1,683,000 in dead money to 2013.

Tossing these savings back into the pot, we get:

[FINAL TOTAL UPDATED 5:40pm] $8,570,000 + $1,750,000 + $3,641,000 = $13,961,000

That's not a bad number, all things considered. Sadly, while I think the Leinart cut is pretty likely, given the emergence of the Homeless Man's Aaron Rodgers last year, I don't think the Texans will cut ties with Jacoby. I really hope I'm wrong about that, and I'd have said that even if there was no savings to cutting him.

***

[^1] If you are really curious, I say "more or less" because the following are excluded:

(A) "Taxes/surcharges" on regular season, preseason, and postseason gate receipts (including ticket revenue from "luxury boxes," suites, and premium seating) which are comprised of (A) admission taxes, (B) taxes on tickets regularly paid to go-63 vernmental authorities by Clubs or Club Affiliates, provided such taxes are deducted for purposes of calculating gate receipts subject to revenue sharing and (C) surcharges paid to stadium or municipal authorities which are deducted for purposes of calculating gate receipts subject to revenue sharing (which amounts approximated in the aggregate $119,666,000 for the 2010 League Year);

(B) Revenues derived from wholesale merchandising opportunities (i.e., the manufacture and distribution of merchandise to third-party retailers) conducted by Dallas Cowboys Merchandising ("DCM") other than any related royalty payments to any League entity, Club or Club Affiliate (which amounts are projected as of the effective date of this Agreement to be approximately $80 million for the 2011 League Year);

and (C) Revenues from the PSLs sold by the New York Jets and New York Giants that are dedicated to the construction of New Meadowlands Stadium, including the amortization to League Years during the term of this Agreement of such previouslysold PSLs (which amounts are projected as of the effective date of this Agreement to be approximately $43 million for the 2011 League Year). (D) Any PSLs that were excluded from the calculation of Total Revenues under the Prior Agreement, to the extent that the amortization schedule has not expired.

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