Capflation: Why are these QB contracts getting so rich?

Thursday it was announced that the Atlanta Falcons had reached an agreement on a massive 5-year, $150M contract with Matt Ryan, making Ryan the first $30M per year players in the NFL. With Seattle Seahawks quarterback Russell Wilson set to be a free agent in two years, many fans and observers went nuts asking how much Russell will make and whether the team be able to afford him?

This brings to the front of the line why the top salaries are increasing so rapidly. It was just under three years ago that Russell Wilson signed a massive contract for $21.9M annually, and now Wilson’s contract can’t even smell the burning rubbing coming off of the skid marks Ryan’s contract left on the road it’s so far behind him. The five highest paid quarterbacks have all received their current contracts in the last two years, so what is at play that is driving up quarterback prices so high?

There are several factors at play, as obviously the importance of the quarterback position is certainly key, however, I’m going to focus on one specific area today. That area is the effect of cap funneling on the contracts of highly paid players and how it channels large amounts of money to just a few recipients.

Cap funneling, despite the word funneling coming into more popular use for negative reasons in recent days, is the system by which the highest paid NFL players see their pay increase disproportionately to the lower paid players in the league. In order to understand that, let me first lay out a chart of the NFL minimum salaries, along with the percentage at which those minimum salaries will increase over the next two seasons.

Now, the important takeaway form that is that the salary for players on minimum contracts is increasing at between 1.46% and 3.23% each year. The reason those numbers are important is because of the following trend of the salary cap. The following is a table of the salary cap for the NFL for every year since 2008, along with the projected cap for the next two years. Also included is the percentage growth in the cap.

We hear pundits say all the time that it’s the “increasing salary cap” that is the reason player salaries have been driven through the roof, but that is not the only variable in play. What is happening is that as we see when looking at the growth of the salary cap versus the growth of minimum salary contracts is that since 2014 the salary cap growth is far outpacing minimum salary growth.

At any given time a team will typically have between twenty and thirty players, if not more, on contracts that are at or close enough to the minimum that the effects of cap funneling are seen. What happens is that as the salary cap increases as the rates of 5.76%-7.72% as it has in recent years, while the minimum salaries increase by 1.46%-3.5%, there is slippage of cap space allocated away from lower salaried players, and that money gets funneled to higher paid players.

There is no exact answer on this because the effect is slightly different for every team based on the number of minimum to low salary players and how many accrued seasons each of those has, so for this example, let’s simply assume that a theoretical team has 25 players making close to the minimum, with the average salary of $646,000 (That’s 4 players at each of $480k, $555k, $630k and $705k, three at $790k and one at each of $915k and $1.015M.) That gives those 25 players a combined base salary cap hit of $16.15M.

Then, in 2019, assuming the same allocation of minimum salary players with the minimum salary increases of $15,000 as required under the CBA, those same 25 roster spots held by minimum salary players would have a base salary cap hit of $16.525M, an increase of just 2.3%.

In contrast, the salary cap is estimated by OverTheCap.com to be roughly $190M in 2019, which is an increase of $6.74%. That difference between the 6.74% salary cap increase and the 2.3% What that does is create $713,510 (calculated by (($16.15M * 1.0674) - $16,525M)) that is basically free cap space to a team simply by keeping the same number of players in similar minimum salary slots from one season to the next. This is a very oversimplified example to simply demonstrate the effect and show where it comes from. Further, if a team has more players in minimum slots, more space will come from this effect, while if a team has more players on higher contracts, less space would be created from this.

Then, on top of the $713,510, there is the additional cap space that teams get from the cap itself increasing. Based on the prior estimate of $190M and subtracting the 2018 cap of $177.2M, that’s another $12.8M in new cap space.

Combining those two numbers together, there is about $13.5M in available free cap space for 2019 for out theoretical team to allocate. Now, most teams only have a handful of players each season that are worth even considering handing out a pay increase to. Take, for example, this offseason for the Seahawks. Of the long list of free agents, there are only a handful of players who fans would have considered retaining at a significant raise over their 2017: Sheldon Richardson, Paul Richardson and Jimmy Graham.

Now, the 2018 Seahawks are a poor example because their cap is off kilter due to the 2017 additions of Sheldon Richardson and Duane Brown, along with Jeremy Lane’s failed physical with the Texans. However, we’re looking at this from a very basic, theoretical angle, so we aren’t going to get too deeply into the details, just the concept.

In any case, what we’ve got in most situations is that the majority of roster spots are filled by players already under contract at an affordable cap hit, which leaves all the new, free money able to be allocated to the handful of players who warrant a big contract. So, say for example that $13.5M from above is divided among four or five players, that’s an additional $3-4M available to give to each of those highly paid players, and that’s exactly what we see happening across the league.

For example, here is the progression for the highest paid QBs since 2012:

So, basically what is seen there is the Aaron Rodgers contract staying the top contract for three straight seasons, largely mirroring the stagnation of the salary cap from 2011 through 2013. There are other factors, including Russell’s agent not fighting for the top available dollar, but that’s a different story for a different day. What is seen is that in each season there is an increase of roughly $3M in APY for the highest paid quarterbacks. As we move forward, it’s not hard to imagine Rodgers, Ben Roethlisberger or Russell Wilson resetting the market up another $2-3M, as all three of those quarterbacks could be extended in the next year to eighteen months.

However, what is important to keep in mind is that with the CBA is set to expire in 2020, these mega contracts will carry over into the new CBA. In the last round of negotiations the players lost a significant amount of their monetary allocation, which is what led to the salary cap dropping from 2009 to 2011, despite league revenues increasing by 9.98% over that two year period.

The players are slated to have the same lead negotiator handling things, and to me that says that we could easily see more revenue shift around, and the salary cap stagnate or decrease yet again as a result. Any team with a massive cap commitment past the 2020 season for a single player could find itself severely hamstrung as it attempts to maneuver forward. I’ll be looking at this more in detail in another piece in the coming days, so you can all look forward to being bored by that. In any case, I believe this has played a major role in the strategy of the front office, and may be reflected in the fact that the only players on the Seahawks roster with any kind of cap hit past the end of the current CBA in 2020 and into any potentially new CBA are the nine rookies they just added in the draft.

We’ll have to wait and see, but be ready for the debate about whether to pay Russell $35M or to trade him. Regardless of what side you fall on that discussion, the debate is going to rage until the Seahawks either extend Wilson or make an unexpected change.