Saturday, March 21, 2009

A loophole around the NFL's 30 Percent Rule

I originally intended this blog to be only for the discussion of compensatory picks, but I'm making an exception for this post.

The 30 Percent Rule explained

Because the NFL is in the final year of the salary cap, teams aren't able to structure contracts quite in the same way they typically do, with the first-year cap number being especially small. The 30 Percent Rule limits the annual increase in certain components of a player's cap number to 30 percent of those components in the Final Capped Year, starting in the first uncapped year. Because this is the Final Capped Year, this year's cap details are what determines how much a contract can increase each season after this. That limits how small this year's cap number can be when using the normal structure of a contract.

For example, consider a five-year veteran signing a three-year contract for $15 million, with a $6 million signing bonus and a total of $9 million in base salaries. If the cap currently extended through 2011, that contract could be structured with a cap hit this season of $2.62 million ($620,000 base salary and $2 million signing bonus allocation). But in reality, because 2010 and 2011 currently are uncapped, the contract must comply with the 30 Percent Rule. In the case of this particular contract, that means the base salaries can't increase by more than 30 percent of this year's base salary. So the lowest this year's base salary could be is $2,307,693, which could increase to $3 million in 2010 and $3,692,307 in 2011, for a total of $9 million in base salaries. This year's cap number would be $4,307,693 — or almost $1.7 million more than it would be using the normal contract structure.

The key to structuring contracts that comply with the 30 Percent Rule is knowing which components are included in the calculations (most of them) and which components are not included (mostly signing bonuses and other amounts treated as signing bonuses, except that option bonuses paid to extend a contract are included).

The challenge most teams are having while structuring contracts this year is finding a way to minimize this year's cap hit while also guaranteeing the player as much money as possible. Other cap rules limit the types of payments that can be guaranteed in future seasons without affecting this year's cap, and the 30 Percent Rule limits the amounts of those payments as compared to this year's cap number.

Many teams are using a protected option bonus in 2010 to increase a player's guaranteed money while limiting this year's cap hit. Because option bonus prorations start in the season they're paid, this year's cap number isn't affected by an option bonus paid in 2010. But because option bonus prorations are included in the calculations for the 30 Percent Rule, the other cap components that are included in the calculations have to be large enough this season to keep the contract compliant in 2010, when the option bonus proration is included. That restricts just how low this year's cap number can be.

The loophole

One team, though, has found a loophole in the 30 Percent Rule that can be used essentially to guarantee money while at the same time minimizing this year's cap number in the usual manner. The New Orleans Saints have used what is known as a "completion bonus" in the contracts of Jonathan Vilma, Jon Stinchcomb and Jabari Greer.

Here is Artcle XXIV, Section 7(b)(iv)(16) of the Collective Bargaining Agreement, which is under "Amounts Treated as Signing Bonuses" —

(16) 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 at the one-year Treasury Note rate published in The Wall Street Journal on February 1 of the League Year in which the Player Contract is executed. Further, if any event occurs which extinguishes the player’s right to receive such completion bonus, any amount of the bonus that has previously been included in Team Salary shall be immediately added to the Team’s Salary Cap for the current League Year, if such event occurs prior to June 1, or for the next League Year, if such event occurs after such date, with the remainder of the bonus that has been allocated to Team Salary for future League Years immediately extinguished.

Essentially, Vilma, Stinchcomb and Greer will receive a completion bonus in 2010 if they fulfill their contract obligations this year without holding out or seeking to renegotiate. Completion bonuses can be fully guaranteed for skill or injury, they aren't included in the calculations for the 30 Percent Rule, and the key to the loophole is that their prorations don't begin until 2010, the season in which they're paid. This loophole allows the Saints, or any other team that uses a completion bonus, to guarantee more money while also minimizing this year's cap hit to a greater degree than any other method of structuring a contract.

Although the Saints' use of completion bonuses has been reported in the media, including by Jason Cole of and by Mike Triplett of The Times-Picayune, the issue has gone largely unnoticed. This might be because Cole's article focused on the "good behavior" aspect of completion bonuses or because the Saints' completion bonuses are relatively small ($5.5 million for Stinchcomb, $3.53 million for Vilma and $2 million for Greer). It would have received much more attention if the Washington Redskins had used a completion bonus to give Albert Haynesworth a first-year cap number of, say, $3.8 million — or, theoretically, as low as $2.796 million — instead of $7 million. If the "highest-paid defensive player in NFL history" had a lower first-year cap number than free-agent signings such as Frank Omiyale ($4.95 million) and Phillip Buchanan ($4.0 million), that would get attention.

Haynesworth got a seven-year contract worth $80 million, with $41 million of that guaranteed. He also has $35 million in Not Likely To Be Earned incentives. His guaranteed money consists of a $5 million signing bonus, a $21 million protected option bonus in 2010 and $15 million in base salaries during his first three years. His first-year base salary is $6 million, which along with his $1 million signing bonus proration gives him a cap number of $7 million for 2009. He will receive a total of $11 million this year ($5 million signing bonus and $6 million base salary) and $24.6 million in 2010 ($21 million option bonus and $3.6 million base salary) if the Redskins exercise the option. If the Redskins don't exercise the option, several of the base salaries would increase and become fully or partially guaranteed, adding up to the same $21 million in additional guarantees, making the option bonus "protected" and that money guaranteed.

By using a completion bonus instead of an option bonus, the Redskins could have given Haynesworth a much lower cap number while still paying the same amount of money in the same seasons. For example, the Redskins could have paid him a $9 million signing bonus and $2 million base salary this season, giving him the same $11 million this year but a cap hit of just $3.8 million. In 2010, the Redskins could pay him a base salary of $2.6 million, which would comply with the 30 Percent Rule, plus a $22 million guaranteed completion bonus for fulfilling his obligations in 2009. The total payout for 2010 would be $24.6 million, and his cap number (if 2010 becomes capped) would be $8.8 million, with both numbers being the same as in his actual contract. The rest of the contract theoretically could follow the same pattern, with completion bonuses and base salaries combining to match the annual payouts in the current contract.

Most of the major signings this offseason occurred before the Saints signed Vilma, Stinchcomb and Greer. It will be interesting to see if any other teams use the same contract structure this offseason. In particular, it could help teams fit rookies' contracts into the rookie pool while still complying with the 25 Percent Rule for rookies (although the CBA doesn't specify whether a completion bonus would be treated the same for the 25 Percent Rule as it is for the 30 Percent Rule). And it could help a team looking to give a player a huge contract or contract extension without making a huge dent in the salary cap, such as the Dallas Cowboys' attempts to extend DeMarcus Ware's contract. Using the completion bonus loophole around the 30 Percent Rule, the Cowboys theoretically could give Ware a contract larger than Haynesworth's but with a much smaller impact on their salary cap.


pats1 said...

Hey Adam, not sure if you noticed, but the three Saints contracts, at least at some point, were rejected by the NFL:

AdamJT13 said...

The Saints' contracts were disapproved, then approved again after changes were made. But the completion bonuses are in the approved contracts.

From Mike Triplett's blog --

"All three deals had to be resubmitted to the league last week because of an unrelated issue with some of the guaranteed money, but they have since been approved."

Miguel said...

Does the provision that rookie's deal can not be renegotiated for two years override the completion bonus?? That is, the inclusion of a completion bonus does not seem to provide any benefit to a team that is not already

To clarify my question, if a team can give a rookie a completion bonus, then they could give it to him even if the player has missed TC or games because he would not missed any games under his contract. That just seems wrong to me.

Miguel said...

Can a player who is signed to a current contract be extended and have the completion bonus as part of the extension???That is, the inclusion of a completion bonus does not seem to provide a benefit (other than getting around
the 30% rule) to a team when they are extending a player.

AdamJT13 said...

A completion bonus seems to protect the team against any action by the player that would prevent him from fulfilling his contract requirements for that season. Apparently, that includes off-the-field problems as well as holdouts. And the CBA has a mention of completion bonuses for rookies, so they appear to be allowed in rookies' contracts.

Miguel said...

Since a completion bonus is considered a likely to be earned incentive for rookies and is valued at 100%, would not a 2009 completion bonus for a rookie be counted against the 2009 cap (albeit prorated over the life of the contract)??

AdamJT13 said...

If the completion bonus is paid in 2010, as the Saints' completion bonuses are, the proration apparently begins in 2010. Teams also could designate a completion bonus in a rookie's contract as earned in 2010 and paid in 2011. The question is whether completion bonuses are excluded from the 25 Percent Rule as they are from the 30 Percent Rule, but the CBA doesn't specify whether they are.

Miguel said...

I should have been clearer. Since the completion rule is considered an incentive for rookies AND because LTBE incentives are supposed to hit the 2009 cap when they are reached, should not the completion bonus be paid in 2009??

AdamJT13 said...

The money wouldn't have to be paid until the contract says it has to be paid. And it wouldn't necessarily count against the 2009 cap, just as other incentives paid in 2010 wouldn't count in 2010. An escalator clause, for example, could be triggered in 2009 by an LTBE incentive, paid in 2010 and count against the cap in 2010.

Without examples of previous completion bonuses to look at, it's impossible to know exactly how they would be treated in a rookie's contract. But at least we know for sure that the loophole can be used in veterans' contracts.

Future GM said...

I understand the concept of lowering the cap hit for the current year. That's a beautiful thing for GM's. But, the problem this poses is a larger cap hit in the succeeding years, right? So it's a short-term solution creating a longer term problem. And if the bonus becomes guaranteed, then even if a player is released that money becomes "dead money." Money that takes up a portion of the cap allotment but isn't being paid to a member currently on the team.

So I guess my question is, isn't this a sort of like picking at a scab? Sure it makes the wound look better now, but it will cause it to scar later on. So is there a real solid use to this that I'm missing?

TIM said...

The Nineres just used this loophole to give Patrick Willis a 5 year 53 million dollar deal !