cash over cap?

[JAMIEBUF12]

i still do not understand the whole cash over cap part of the salary cap.i was watching espn outside the lines and they said washington got to spend 118 million dollars this year.something about if you pay the bonuses up front they dont count.and now that dan snyder can be a player in free agancy this season when he is still over the 102 million cap?makes no sense to me..i thought the reason football worked was because it had a hard salary cap.if anyone can explain the whole cash over cap theory it would be greatly appreciated.go bills in'06

[MartyBall4Buffalo]

What does the term "cash over cap" mean?

 

To comprehend the concept of cash over cap, one has to understand that the salary cap is just a bookkeeping number, one that can be massaged by amortizing signing bonuses, among other mechanisms. The cap has never been indicative of a team's payroll. For example, the Redskin organization, believed to be the highest revenue-producing machine in the league, has had payrolls well over $100 million the last few seasons, even while the highest salary cap level ever was in 2005, at $85.5 million. The difference between a team's true payroll and its salary cap number is essentially what "cash over cap" means.

 

 

 

 

http://sports.espn.go.com/nfl/news/story?id=2351462

[Pyrite Gal]

Cliff notes begin: This particular lengthy reply goes into detail about what cash over cash means using a Billsworld example. I believe it tracks the shorter defitintion above. Iwent to this length because the economics of the NFL are so complicated for me that it helps me understand it to try to explain it. I also figured that some others who are interested by still confused by the buzz phrases might benefit from a more detailed explanation.

 

Finally, some of this may be incorrect either due to typos or my own misunderstanding of the economics. I appreciate any corrections that folks can make to this salvo. Cliff notes end

 

Another way of phrasing the same thing is that the important thing to remember about the bonus is that it must be paid to the player up front but for purposes of calculating the cap hit it can be prorated (its value spread) over the lifetime of the contract.

 

Thus, lets say the Bills provide RJ with a contract with a total value of $25 million over 5 years. A simple way to figure the cap hit (let;s call this calculation #1)would be to divide 25 by 5 for a cap hit of $5 million annually, but this would be incorrect. The actual amount of money he gets varies each year because of the terms of the contract.

 

Let's say he gets a $8 million bonus paid up front and divide the remaing salary over the 5 years ($3.4 million/year). This second number is called base salary Another method for figuring out the cap hit (call this calculation #2) would be to say that he got $11.4 million in actual cash his first year so his cap hit would be $11.4 million, and he gets $3.4 million in actual cash his second year so his cap hit would be $3.4 million. However, this is not how the cap is calculated and this would also be incorrect.

 

The way the cap is actually calculated (call this calculation #3) is that the bonus payment he received up front is actually prorated (its value spread) over the life of the contract. Thus each year his calculated cap hit is his base pay + his prorated bonus payment. So, if you divided the $17 million allocated to base pay evenly ($3.4 million) and added that annually to his prorated bonus ($8 million/5 = $1.6 million) giving him a total annual cap hit of $5 million.

 

The oddity here is that though the results of calc #1 and calc #3 are the same #1 is incorrect and #3 is correct. The difference is that in the real world base salaries are not distributed evenly each year. By using the method in calc #3 rahther than simply dividing the total contract amount over the total contract length, teams can aggree to the total value a player demands, but vary the payout and thus the cap hit as fits their needs.

 

Thus, teams often will give a player a low base salary but a large bonus because they can then prorate that payment over several years for salary cap calculations.

Alternately, in the case of Antoine Winfield with he Vikes for a variety of reasons had a large cap number in his first year to play with. By giving AW a huge base salary they were able to pay him money and get the cap hit out of the way

 

Teams and players will also often agree to make the final year under contract a large base salary payment and by doing so they force the team to make a decision about whether to invest in a player or let him go. Depending upon the risk/figuring of both the player and the team this prod can be advantageous. In fact, both sides have taken to aggreeing to bonus payments scheduled for the off-season which force a team to either fish or cut bait on a player on a schedule which dovetails with free agency.

 

Now, the cash over cap number is important because of cashflow issues and the relative liquidity (meaning how easily wealth can be turned into cash) of teams. Both Ralph and Dan Snyder (or in essence the Bills and the Skins) are rich. However, the Skins are so rich in terms of $ the franchise brings in and so much $ are moving around through the Skins framework that it is a simpler matter for them to pu together the several million dollars in cash needed for a bonus payment to a player.

 

The low revenue Bills on the other hand, have less wealth (fewer assets) than the Skins and also less $ in transit through their system. In order for the Bills to pay out a large bonus, they have to change assets from locked up investments like longer term certificates of deposit which provide greater cash returns than shorter term financial vehicles into cash so they can pay that bonus. Or they can take their ongoing income from selling seats and other profitable items and rather than purchasing financial vehicles which lock up the wealth in exchange for higher yields, they do not invest it but sit on it with the thought of paying it as a bonus quickly.

 

Because the Skins have so much money and make it so quickly this cash they are sitting on figuring they will pay it out soon makes little difference to them. However, for the lower revenue Bills with a snaller cashflow, this cash makes a bigger difference to them as a higher marginal portion of their wealth.

 

As said above (in a far shorter form with far less detail) the cash over cap is the amount of total cash the team is paying out in a give year, even though the salary cap number of that particular year is smaller than that cash outlay because they can prorate the payment over the life of the contract.

 

An example of cash over cap is seen in this RJ example.. Let's say that in the first year of his contract, the Bills cap number consists of his prorated bonus ($1.6 million) + his base salary (we will arbitrarily call that ($1.4 million). In this example the RJ cap hit for his first year is $3 million.

 

However, we paid him an upfront bonus in cash that first year of $8 million making our actual cash payment to him $9.4 million. Thus, in that year we had a payment of $6.4 million over the salary cap.

 

Everyone in the league makes payments such as this one all the time. However, because of their greater wealth and cash flow the Skins do this quite a bit. To some degree they are simply robbing Peter (the future) to pay Paul (the present). However, unless there is some final day of judgment where all accounts come due and are collected, the Skins can routinely pay out bonuses and prorate them into the future. They eventually get into trouble as in this year when they had to renegotiate a ton of contract (more Peter/Paul stuff as they generally converted base salaries contracted for 2006 into bonus payments which could be prorated over the life of the contract- thus their immediate cap hit was lowered) and also hat o cut a number of playerrs like Lavar Arrington). However as the Skins have the wealth to take a hit like curring an Arrington each year, its a much bigger deal and a marginally heavier lift for the Bills to take a hit like Mike Williams.

 

Generally, you see wealthier teams making a lot of large bonus payments compared to a team like the Bills. Because they can afford to do it, their amount of cash laid out versus the salary cap tends to be higher.

 

Yjus lower revenue squad wished to balance the playing field by having higher revenue teams pay into a pool to be redistributed to lower income teams depending upon their ability to lay out cash over their cap amount.

 

Some call it equity while others call it welfare. The Bills would argue thought that the Skins are only able to make the money they do because their is an entire league nationwide to be competed with. In order to be nationwide and because of tradition and reality some of those markets are simply in lower revenue areas, thus redistribution of wealth earned by the Skims is mandated by their desire to produce a competitive product.

 

That' cash over cap.

[clumping platelets]

[Mark Long Beach]

I enjoyed it, and pretty much understood it. Then again, I'm the CFO for a small company. ...Not sure how everyone else did.

[Fixxxer]

I enjoyed it, and pretty much understood it.  Then again, I'm the CFO for a small company. ...Not sure how everyone else did.

622476[/snapback]

 

It doesn't compute in the brain of mine, but to be honest with you I didn't put the effort to understand it.

[Orton's Arm]

622389[/snapback]

FFS/Pyrite Gal did a good--if lengthy--job describing cash over cap. Here's the short version:

 

You sign a guy to a four year contract, and give him an $8 million bonus. Instead of taking the cap hit for that bonus all at once, you get hit with $2 million of cap hit a year for four years.

 

If there's a year when you pay out a bunch of bonuses like this, the actual cash you pay out to players will exceed the salary cap space you've been given. But you can only do that for so long. Eventually, you're required to even things out. You can postpone the day of reckoning, but in the long run, cash paid out must not exceed salary cap space. So if the cash you paid out in 2002 exceeded the cap by $10 million--which you can do through bonuses--at some point you'll wind up only being allowed to pay $10 million less than the cap to your players.

[MartyBall4Buffalo]

As long as it was I thought it read pretty easy and was simple to follow. I appreciated the detailed analysis.

[Guest BackInDaDay]

How, exactly, does one become a Pyrite Gal (or Guy)? Does it require the injestion and/or inhalation of said Pyrite?

[Fixxxer]

How, exactly, does one become a Pyrite Gal (or Guy)?  Does it require the injestion and/or inhalation of said Pyrite? 

622497[/snapback]

 

Try it, it.. just... may work

[obie_wan]

"The low revenue Bills on the other hand, have less wealth (fewer assets) than the Skins and also less $ in transit through their system. In order for the Bills to pay out a large bonus, they have to change assets from locked up investments like longer term certificates of deposit which provide greater cash returns than shorter term financial vehicles into cash so they can pay that bonus. Or they can take their ongoing income from selling seats and other profitable items and rather than purchasing financial vehicles which lock up the wealth in exchange for higher yields, they do not invest it but sit on it with the thought of paying it as a bonus quickly."

 

 

In order to compete with the Redskins of the world for free agents, Ralph will have to use cash from his other businesses because the cash flow ofrom the low revenue Bills situation is inadequate. The team may have "value", but it's cash flow is absorbed by player costs and operating costs.

 

Ralph may be "rich", but his personal wealth is not in the same class as teh billionaire owners.

 

Since the team is not producing excessive cash flow and Ralph has limited personal resosurces, the Bills are at a major disadvantage.

[Orton's Arm]

How, exactly, does one become a Pyrite Gal (or Guy)?  Does it require the injestion and/or inhalation of said Pyrite? 

622497[/snapback]

It requires posts that are a lot longer than this one!

[JAMIEBUF12]

Cliff notes begin: This particular lengthy reply goes into detail about what cash over cash means using a Billsworld example. I believe it tracks the shorter defitintion above.  Iwent to this length because the economics of the NFL are so complicated for me that it helps me understand it to try to explain it.  I also figured that some others who are interested by still confused by the buzz phrases might benefit from a more detailed explanation.

 

Finally, some of this may be incorrect either due to typos or my own misunderstanding of the economics. I appreciate any corrections that folks can make to this salvo.  Cliff notes end

 

Another way of phrasing the same thing is that the important thing to remember about the bonus is that it must be paid to the player up front but for purposes of calculating the cap hit it can be prorated (its value spread) over the lifetime of the contract.

 

Thus, lets say the Bills provide RJ with a contract with a total value of $25 million over 5 years.  A simple way to figure the cap hit (let;s call this calculation #1)would be to divide 25 by 5 for a cap hit of $5 million annually, but this would be incorrect.  The actual amount of money he gets varies each year because of the terms of the contract. 

 

Let's say he gets a $8 million bonus paid up front and divide the remaing salary over the 5 years ($3.4 million/year).  This second number is called base salary  Another method for figuring out the cap hit (call this calculation #2) would be to say that he got $11.4 million in actual cash his first year so his cap hit would be $11.4 million, and he gets $3.4 million in actual cash his second year so his cap hit would be $3.4 million.  However, this is not how the cap is calculated and this would also be incorrect.

 

The way the cap is actually calculated (call this calculation #3) is that the bonus payment he received up front is actually prorated (its value spread) over the life of the contract.  Thus each year his calculated cap hit is his base pay + his prorated bonus payment.  So, if you divided the $17 million allocated to base pay evenly ($3.4 million) and added that annually to his prorated bonus ($8 million/5 = $1.6 million) giving him a total annual cap hit of $5 million. 

 

The oddity here is that though the results of calc #1 and calc #3 are the same #1 is incorrect and #3 is correct.  The difference is that in the real world base salaries are not distributed evenly each year. By using the method in calc #3 rahther than simply dividing the total contract amount over the total contract length, teams can aggree to the total value a player demands, but vary the payout and thus the cap hit as fits their needs.

 

Thus, teams often will give a player a low base salary but a large bonus because they can then prorate that payment over several years for salary cap calculations.

Alternately, in the case of Antoine Winfield with he Vikes for a variety of reasons had a large cap number in his first year to play with.  By giving AW a huge base salary they were able to pay him money and get the cap hit out of the way

 

Teams and players will also often agree to make the final year under contract a large base salary payment and by doing so they force the team to make a decision about whether to invest in a player or let him go.  Depending upon the risk/figuring of both the player and the team this prod can be advantageous.  In fact, both sides have taken to aggreeing to bonus payments scheduled for the off-season which force a team to either fish or cut bait on a player on a schedule which dovetails with free agency.

 

Now, the cash over cap number is important because of cashflow issues and the relative liquidity (meaning how easily wealth can be turned into cash)  of teams.  Both Ralph and Dan Snyder (or in essence the Bills and the Skins) are rich.  However, the Skins are so rich in terms of $ the franchise brings in and so much $ are moving around through the Skins framework that it is a simpler matter for them to pu together the several million dollars in cash needed for a bonus payment to a player.

 

The low revenue Bills on the other hand, have less wealth (fewer assets) than the Skins and also less $ in transit through their system. In order for the Bills to pay out a large bonus, they have to change assets from locked up investments like longer term certificates of deposit which provide greater cash returns than shorter term financial vehicles into cash so they can pay that bonus.  Or they can take their ongoing income from selling seats and other profitable items and rather than purchasing financial vehicles which lock up the wealth in exchange for higher yields, they do not invest it but sit on it with the thought of paying it as a bonus quickly.

 

Because the Skins have so much money and make it so quickly this cash they are sitting on figuring they will pay it out soon makes little difference to them.  However, for the lower revenue Bills with a snaller cashflow, this cash  makes a bigger difference to them as a higher marginal portion of their wealth.

 

As said above (in a far shorter form with far less detail) the cash over cap is the amount of total cash the team is paying out in a give year, even though the salary cap number of that particular year is smaller than that cash outlay because they can prorate the payment over the life of the contract.

 

An example of cash over cap is seen in this RJ example..  Let's say that in the first year of his contract, the Bills cap number consists of his prorated bonus ($1.6 million) + his base salary (we will arbitrarily call that ($1.4 million). In this example the RJ cap hit for his first year is $3 million.

 

However, we paid him an upfront bonus in cash that first year of $8 million making our actual cash payment to him $9.4 million.  Thus, in that year we had a payment of $6.4 million over the salary cap.

 

Everyone in the league makes payments such as this one all the time.  However, because of their greater wealth and cash flow the Skins do this quite a bit. To some degree they are simply robbing Peter (the future) to pay Paul (the present).  However, unless there is some final day of judgment where all accounts come due and are collected, the Skins can routinely pay out bonuses and prorate them into the future.  They eventually get into trouble as in this year when they had to renegotiate a ton of contract (more Peter/Paul stuff as they generally converted base salaries contracted for 2006 into bonus payments which could be prorated over the life of the contract- thus their immediate cap hit was lowered) and also hat o cut a number of playerrs like Lavar Arrington).  However  as the Skins have the wealth to take a hit like curring an Arrington each year, its a much bigger deal and a marginally heavier lift for the Bills to take a hit like Mike Williams.

 

Generally, you see wealthier teams making a lot of large bonus payments compared to a team like the Bills. Because they can afford to do it, their amount of cash laid out versus the salary cap tends to be higher.

 

Yjus lower revenue squad wished to balance the playing field by having higher revenue teams pay into a pool to be redistributed to lower income teams depending upon their ability to lay out cash over their cap amount.

 

Some call it equity while others call it welfare. The Bills would argue thought that the Skins are only able to make the money they do because their is an entire league nationwide to be competed with.  In order to be nationwide and because of tradition and reality some of those markets are simply in lower revenue areas, thus redistribution of wealth earned by the Skims is mandated by their desire to produce a competitive product.

 

That' cash over cap.

622241[/snapback]

wow! thanx for such a awesome explanation i understand alot better now....and now i hate the skins even more lol

[Guest BackInDaDay]

Since the team is not producing excessive cash flow and Ralph has limited personal resosurces, the Bills are at a major disadvantage.

622505[/snapback]

 

Which is why, according toall the reports I've seen, the highest grossing 15 franchises will subsidize the lowest 17 franchises share of bridging the gap between the shared revenue and the new. For now, at least, all the Bills and the 16 other teams have to do is meet the minimum team salary requirement.

 

I'm waiting to hear what was done there. If it's still based upon the defined gross revenue(DGR), how is this new DGR defined? What percentage of this DGR defines each team's min salary requirement? How does it increase through the life of the CBA? The answer to these questions could give us a better idea of how 'friendly' the new CBA is to the low-revenue clubs.

 

I can't believe it will do anything but begin at a reasonable rate and increase at a reasonable rate. Why go to all the trouble of restructuring the revenue sharing if this isn't the case? The agreement is to extend the financial growth of the league through competitve play. Low-end teams have to have the resoures to field competitve teams, let alone, make payroll. Along that line of thinking, I wouldn't be surprised to hear there are 'cash over cap' limits in this CBA to help balance things. Take some resources away from the high-end and give some to the low-end.

[obie_wan]

Which is why, according toall the reports I've seen, the highest grossing 15 franchises will subsidize the lowest 17 franchises share of bridging the gap between the shared revenue and the new.  For now, at least, all the Bills and the 16 other teams have to do is meet the minimum team salary requirement. 

 

I'm waiting to hear what was done there.  If it's still based upon the defined gross revenue(DGR), how is this new DGR defined?  What percentage of this DGR defines each team's min salary requirement?  How does it increase through the life of the CBA?  The answer to these questions could give us a better idea of how 'friendly' the new CBA is to the low-revenue clubs.

 

I can't believe it will do anything but begin at a reasonable rate and increase at a reasonable rate.  Why go to all the trouble of restructuring the revenue sharing if this isn't the case?  The agreement is to extend the financial growth of the league through competitve play.  Low-end teams have to have the resoures to field competitve teams, let alone, make payroll.  Along that line of thinking, I wouldn't be surprised to hear there are 'cash over cap' limits in this CBA to help balance things.  Take some resources away from the high-end and give some to the low-end.

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PArt of the trade off from the large market teams to kick back some cash is that they will be allowed to exceed the cap through signing bonuses. The amount they can exceed will be computed on a 3 year rolling average and will added to the cap in a later year.

 

The kick back from the high revenue teams will only allow the small market clubs to approach a level playing field for the actual cap. It will not allow fund signing bonuses for small market clubs.

[Guest BackInDaDay]

PArt of the trade off from the large market teams to kick back some cash is that they  will be allowed to exceed the cap through signing bonuses. The amount they can exceed will be computed on a 3 year rolling average and will added to the cap in a later year.   

 

The kick back from the high revenue teams will only allow the small market clubs to approach a level playing field for the actual cap. It will not allow fund signing bonuses for small market clubs.

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Thanks obie_wan.

 

I guess whether their available 'cash over cap' money can be viewed as a limit or not depends on how that computation works. Again, I may be overly optimistic, but I'm hoping it restricts bonus money to some degree to maintain a competitive balance.

 

I think it's a given that the low-ends weren't going to see anymore funding than would be necessary for them to either make the minimum, or spend up to the cap limit. Frankly, I believe the high-end 15 have done enough. You should still be able to field a competitve team with a salary of 100M. Granted, you may miss out on some of those bonus-babies, but the low-ends still have all of their same retained revenues in place. It may only be half of the high-ends, but it's a significant amount that they don't have to share. Of course, as a concession to the high-ends, the 'cash over cap' limits should be more stringent on the low-ends. You can't have them outbidding the high-ends with their own money.

[fairweather fan]

The golden rule is: He who had the gold, rules.

 

There is a perception that the higher revenue clubs are getting shafted by giving part of their revenue to lower earning clubs. However, because the rules about rolling bonus monies across contract years have been relaxed, Jerry Jones and Daniel Snyder will still be able to attract better free agents, because a bonus in hand is better than an NFL contract on the table, as the NFL contract contains disappering ink whenever the club decides it is to their advantage to release a player. Would a free agent rather sign a contract paying $1 million per year for six years, with a $12 million signing bonus, or a contract for six years at 3 million, (or even 4 million) a year. Even a player with a 6 wonderlich would take the first offer.

[Guest BackInDaDay]

The golden rule is:  He who had the gold, rules.

 

There is a perception that the higher revenue clubs are getting shafted by giving part of their revenue to lower earning clubs.  However, because the rules about rolling bonus monies across contract years have been relaxed, Jerry Jones and Daniel Snyder will still be able to attract better free agents, because a bonus in hand is better than an NFL contract on the table, as the NFL contract contains disappering ink whenever the club decides it is to their advantage to release a player.  Would a free agent rather sign a contract paying $1 million per year for six years, with a $12 million signing bonus, or a contract for six years at 3 million, (or even 4 million) a year.  Even a player with a 6 wonderlich would take the first offer.

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That's a good point, but with a higher cap it be would be wiser to sign the same player to a 6 year contract at $2M a year with a $6M bonus. This way if you cut the guy after 3 seasons you save $6M in contract $$ and even under the old rules your dead cap money is only $3M. My point is, the new CBA may reward a more prudent balance between contract and bonus money. The back-loaded contract with it's huge bonus may now be a financial liability.

 

Does anyone have a link to the 'rolling bonus money' information? I'd like to see that for myself, and I've got more than 45 minutes to check it out.

[socalfan]

That's a good point, but with a higher cap it be would be wiser to sign the same player to a 6 year contract at $2M a year with a $6M bonus.  This way if you cut the guy after 3 seasons you save $6M in contract $$ and even under the old rules your dead cap money is only $3M.  My point is, the new CBA may reward a more prudent balance between contract and bonus money.  The back-loaded contract with it's huge bonus may now be a financial liability. 

 

Does anyone have a link to the 'rolling bonus money' information?  I'd like to see that for myself, and I've got more than 45 minutes to check it out. 

622888[/snapback]

 

 

I presume the CBA won't address this issue, since it benefits the players to get the signing bonus. The obvious reason is that a signing bonus is like guaranteed salary. Once the player has it, he doesn't give it back (unless you are the dollfins and Ricky retires on you), even if he only plays that one year. What would you rather have 5 million a year for 5 years, or 20 million the first year, and 5 million spread over the 5 years? The Bills will never be able to compete for the big names.

 

Which brings up the revenue sharing agreement, today on foxsports I read that the top 5 revenue teams kick in 3 million each year for the next 5 years. The middle rev teams kick in 2 million for each of the next 5 years and the last 5 high revenue teams kick in 1 million for each of the next 5 years. And since it was so paltry, the top 5 revenue teams decided they should kick in 3.5 million more for each of the next 4 years. So for each of the next 4 years there is a pot of 47.5 million. Why 30 voted yes and only 2 voted no will forever be a mystery to me. I guess they really wanted to go home after 2 days.