Tuesday, March 15, 2016

Salary Cap I

With a few days to catch a breath and evaluate the shopping spree that our GM Reese just went on, it is interesting to consider what an enormous change this was for NYG. The accepted, long standing wisdom is that sustained success comes in the NFL primarily from the draft. Free agency is for plugging some holes, for making short term acquisitions at specific positions that you may not be able to fill in the draft, but the core of your team needs to come from the draft. Giants have always been strong proponents of that philosophy. But in truth, Giants have made key FA acquisitions in the past that led to championships; specifically I am thinking of Kareem MacKenzie, Shaun O'Hara, Antonio Pierce and Plaxico Burress, to name a few, all major FA signings for big money (at the time) that jump started the team and primed them for a title run. In addition, there were some short term acquisitions that really helped - I am thinking here of Kawika Mitchell who had a huge, highly effective, if somewhat forgotten season in 2007. Even Sam Madison contributed greatly. These last two, Mitchell and Madison were more of the fill-in style FA that we are used to seeing from the Giants. But the others mentioned earlier were big ticket acquisitions. What makes this year's FA class different is that they all came in the same year, in the same day actually, and the money seems way higher. But - you really have to compare the salaries not to what other players, who signed pre-2016 have gotten, rather what the players are getting this year. It is really not enough to just say - this is what the market is today, without looking a little deeper at to why there is so much money to throw around today. The temptation is to look at it with a simple ratio of contract versus salary cap. As a simple example, Plaxico Burress signed a FA contract with the Giants in March 2005. The contract was for 6 years and valued at $25 million. I won't go into the details of what the signing bonus was, what was guaranteed, etc., let's just say that the average annual value of the contract was around $4.16M per year. The salary cap in 2005 was around $85.5 million; translating Burress' contract with a simple ratio to the 2016 salary cap of $155.27 M would make that 4.16 M be equivalent to $7.5 M in today's adjusted salary cap dollars. Not a bad haul, but not near what the top receivers and top players are getting today.

A more sophisticated look considers not just the ratio of salary cap from one year to another, but rather the trend in growth over a 2 or 3 year period. Take a look at the following graph:

As you can see above, in the period between 2009 and 2013 the salary cap was relatively flat, hovering at around $120M per year. This included one year, 2010 which technically was uncapped when the league and NFLPA were negotiating their contract. But the uncapped year was in name only - teams knew that they could not overreach in the uncapped year, because when the cap was re-instituted the following year, 2011, they would be in salary cap hell, with lots of players to dump. In fact the Cowboys and Redskins tried to evade the rules and were penalized by the NFL. My point is that during this 5 year period of 2009-2013 where the salary cap was flat, teams had to manage their cap carefully and had to keep player salaries controlled. Now look at the tail of the curve, the period from 2014-2016 where the salary cap grew by $32 M in those 3 years. It's not just the growth this year in 2016 - it's the sustained growth over last 3 years, compared to no growth for the 5 years before that. If you're a mathematics nerd like me, you talk about the derivative, or rate of change of the graph. The derivative was essentially 0 for 4 years and now the rate of change is approximately 8% per year, which when compounded over last 3 years is around 26% growth. The key factor that is encouraging teams to throw around money is that there are no indications that this rate of change will end. We can't be sure or course that it will be 8% again next year, but as TV rights continue to grow, we can be confident that it will go up. In the period of no growth of salary cap, if players salaries would rise as their contracts progressed, the teams would be more strapped cap-wise and unable to make moves. Now however, if teams back-load a contract, they can have confidence that the salary cap will continue to rise and they will have cap money to cover their outlays. In fact, it makes sense to sign top players to long term contracts, because natural growth in the cap will make their annual salaries seem small compared to cap growth in future years. It's kind of like borrowing money today in a period of high inflation - you're paying it back tomorrow in cheaper dollars.

Teams still don't love to shell out huge FA contracts, because the expensive FA contracts take cash out of the team coffers for signing bonuses. But when you're desperate like the Giants were this year, spending the money to get good players is an investment. When the team wins, the value of the franchise is increased. More on salary cap management in later posts.

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