You've just bought an NFL expansion franchise and you want to get to the Super Bowl as soon as possible. You're the impatient type. All right, here's what you do:
You take advantage of the salary cap term, "amortization," which will allow you to realize a lot less on your salary cap than the money you've actually paid your players. Of course, that will allow you to have more good players on your roster than the teams in the league who don't take advantage of the amortization loophole. All of a sudden, you're in first place.
What's so tough about winning, huh? What's wrong with all of those other teams? Why aren't they doing the amortization thing, too? By the way, have the Colts signed Peyton Manning, yet? We could use another quarterback.
Whoa! Slow down, tiger. There's a very stiff price to pay for what you're doing. It's called long-term losing.
That's what happens to teams who build their salary caps on amortization. Do you remember what amortization is from the first installment of "Salary Cap 101?" It's assigning money paid now to other years' salary caps. For example, "signing bonus" money is required by the Collective Bargaining Agreement to be divided evenly by the years of the contract. So, a $5 million signing bonus in a five-year contract results in a million dollars being assigned to each year's cap. It's that way for every team.
So what's the problem? Well, some teams have become a little too creative for their own good. Standard signing bonus amortization is fine, until you introduce a creative tactic known as "restructuring."
Can you say dead man walking?
"Our view of this is evolving," Paul Vance says of the Jaguars' position on negotiating amortization into the team's player contracts. Vance is the Jaguars' salary cap boss. He was handed the league's worst salary cap mess when he took the job in November of 2001, and the Jaguars' problems were the direct result of restructuring contracts.
"You want to have the minimum amount of amortization in the future that the players won't earn; dead money. And then you want to not mortgage the future by paying players at very low cap numbers in early years that become very large cap numbers in later years," Vance added.
But in 1999 and 2000, the Jaguars violated every principle of that logic. They restructured contracts as though the original deals were written in poison ink. And the result was devastating. The Jaguars' streak of four consecutive losing seasons can be directly attributed to the restructuring abuses.
"You don't want to restructure with anybody. You try to keep restructuring to a minimum because that's taking current salary dollars and pushing it into the future and using those dollars to buy players this year," Vance said.
That's exactly what the Jaguars did in '99. It was a team thought to be on the verge of winning it all. The Super Bowl became an "intoxicant," owner Wayne Weaver said.
The Jaguars restructured Tony Boselli's contract, then signed Carnell Lake; restructured Leon Searcy and signed Gary Walker; restructured Jimmy Smith and added Kyle Brady.
Following the 2000 season, the ills of restructuring had become an epidemic that was killing what the team had built. In the winter of 2001, the Jaguars found themselves having to restructure contracts of players just to keep the players they were restructuring. Keeping the core together was destroying the core of the team's future.
Then, the following winter, the bottom fell out. Had it not been for the Houston Texans selecting Boselli, Walker and Seth Payne in the expansion draft, and assuming their combined $16.9 million of remaining amortization, the Jaguars would still be trying to dig out of their salary cap hole.
Wooo! Houston, we had a problem. Thanks for the help.
What is this restructuring and why is it so bad? All right, put your feet on the floor, sit up straight and pay attention. Here we go.
The Jaguars' restructuring practice involved a technique known as "conversion." They would convert salary – which must be declared in full in the year it's paid – into signing bonus. That converted amount would then be amortized over the remaining years of the contract, which, effectively, assigned salary from this year to salary caps of subsequent years.
In other words, folks, if you're making the minimum monthly payment on your credit card debt, it's a good time to stop using the credit card. The Jaguars have learned that lesson.
Under Vance's guidance, the team has put a much greater emphasis on the future. He has introduced something he calls "JAG average," which is a means of taking the total money paid over the first four years of the contract to arrive at an average-per-year figure that offers a player's salary cap profile.
"What are we giving this guy to be on our roster this year?" Vance said in presenting the question that must be answered for a team to know if it's getting its money's worth. "That's the seminal question," he added.
Remember, salary cap figures can be artificial; nothing more than monopoly money. But the checks owners sign are the real thing, and the first four years of a contract are the real-money years. "Very few guys play under their contracts – other than rookies – for more than four years," Vance said.
When Vance approaches a contract negotiation, he considers the profile the player offers. Is he a player coming into his prime years, or past his prime years? Is he a star-caliber player or a young player expected to achieve star status?
The answers to those questions will determine whether or not the Jaguars will employ a technique known as "prepaying." What does prepaying mean?
It's the opposite of pushing money out. Instead of robbing the future to benefit the present, prepaying allows for a bigger hit now to produce a lesser hit later.
Mike Peterson is the perfect example. When the Jaguars signed Peterson as an unrestricted free agent last March, they gave him a $2 million signing bonus and a $2 million roster bonus. So what? Well, the difference in distinctions had a major impact on the Jaguars' salary cap.
Peterson was signed to a six-year deal. That means his signing bonus was spread out evenly over six years. But roster bonus must be declared in full in the year it's paid, so the Jaguars were, in effect, "prepaying" about $1.7 million on their 2003 salary cap. In other words, they were moving money forward.
Wow! You go, guy.
But the best-laid plans don't always allow for the unexpected. That's where Hugh Douglas enters. The Jaguars didn't expect to sign Douglas. They thought he would go early in free agency and for more money than they wanted to pay.
It didn't turn out that way. When he was offered to them at a price they thought was reasonable, they did the deal. The problem was they had to fit him under their cap, and to do that they had to structure the deal with a greater degree of amortization than they would've liked. Considering Peterson is a younger player and Douglas is an older guy, it would've been better to do Douglas' deal more like Peterson's and Peterson's more like Douglas', but it was not a foreseeable circumstance.
To protect themselves against Douglas' age factor, Vance and the Jaguars structured the deal with an emphasis on 2005. That's when Douglas' salary kicks in hardest, which would allow for an escape. More on that technique in the next installment of "Salary Cap 101," which will deal exclusively with salary money.
"Agents love it when you're trying to save cap room because that means guaranteed money and signing bonus," Vance said.
And signing bonus means amortization, and too much of that can addict a team to restructuring contracts, pushing money out and creating a wall of salary cap debt that threatens to summon the league's salary cap police. That's where Tennessee and Indianapolis are; they're restructuring everybody to create cap room, just as the Jaguars did.
That brings us to the most celebrated contract situation in the league today; the Colts' attempt to retain quarterback Peyton Manning, who will become an unrestricted free agent on March 3 if he isn't signed to a new deal.
Manning's salary cap figure last season reached $15.3 million, an out-of-control number that has left the Colts pinned in a corner in attempting to keep their star passer. How did it get that high? Well, it's the result of a combination of factors: Manning was the first pick of the 1998 draft, he reached performance escalators that shot his salary through the roof, and rather than do a contract extension the Colts played him at his high cap number and restructured him to create cap room.
Ah, yes, restructuring.
Now the Colts find themselves unable to scare Manning into contract submission by threatening to hit him with the "franchise" tag. And even if they franchise him, Manning would still be an unrestricted agent.
The real killer for the Colts is that Manning's cap number got so high that he's now reached the second stipulation in determining a "franchise" figure. By franchising Manning, the Colts would have to pay him at 120 percent of his 2003 salary cap figure; $18 million in 2004. So, though the Colts may very well put the franchise tag on Manning on Feb. 24, that may only serve as a short-term solution. After all, how can you negotiate a new deal when he's guaranteed to make $18 million? Who doesn't want $18 million? And the Colts' cap can't afford that kind of hit, anyhow.
And here are the even greater questions: What are the prospects of any team that signs Manning to a contract that might pay him $25 million in signing bonus and $10 million in salary? What would that mean to roster building? Is the quarterback that important?
And is that the bell? Class, dismissed.
