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Trying to understand the Alex Smith contract, and impact on salary cap

There are no attractive options

NFL: Washington Redskins at New York Giants Robert Deutsch-USA TODAY Sports

I have been hesitant to write an article about the Alex Smith contract and salary cap situation in the wake of his injury for a number of reasons.

His contract construction is not at all unusual for an NFL quarterback, but it has a complex structure, and the timing of Alex’s injury and the uncertainties that surround his recovery made it a complex subject.

I also felt that more detailed information would come out with a bit of time following his horrific injury. That instinct has proven correct, as we have just recently heard that the Redskins have a $12m insurance policy in place, and there have been unconfirmed but numerous reports about complications with Smith’s surgery or recovery.

I have seen a few attempts from local journalists to explain the contract and salary cap situation in articles over the past week, and I have seen what I believed to be inaccuracies in every article or discussion that I read, which simply reinforced my opinion that I shouldn’t try to tackle this topic in an article of my own without a more complete understanding of the details.

Feeling out of my depth, I wrote an email to Jason Fitzgerald at OverTheCap to invite him to author an article that would explain to Redskins fans what the situation is with Alex Smith’s contract and the Redskins salary cap situation. I offered to reprint the article here on Hogs Haven to insure that the people who care most about this topic — Redskins fans — would see it.

I heard back very promptly from Jason, and today he posted a fairly comprehensive article on OverTheCap. I believe that this is the most accurate and comprehensive analysis possible at this time, when there are still many open questions about the injury and how the Redskins will manage the roster moving forward.

I will reprint portions of Jason’s excellent article below, and I invite everyone to read the full article on the OverTheCap site; however, I think it’s worthwhile to give a few spoilers at the front end:

Firstly, Jason seems to be making the assumption that Alex Smith will never line up behind center for the Redskins again. That assumption may be premature, but it is not unreasonable. Having written a fair bit about salary cap situations myself (though with less skill and considerably less knowledge of the topic than Jason) I can say that it is often necessary to make some assumptions in order to make the article readable. Otherwise, every sentence has to be accompanied by a dozen alternate scenarios or caveats.

Secondly, there is no good news for the organization or fans as regards salary cap. It’s all pretty much worst case stuff. Interestingly, Jason does not seem to lay any blame on the Redskins for bad contract construction, despite the fact that he rarely has much good to say about how the Redskins deal with contracts. In this case, he said:

Smith’s contract was a pretty standard NFL contract.

Washington does not get any cap relief from the NFL for this injury, which seems to be a topic people are discussing for some odd reason. Teams take on risks when they sign contracts, and they are penalized when the contract blows up. So there is no special list to put Smith on to hide his cap hit. He will simply be placed on the PUP list next year.

In other words, this is not a particularly badly written contract; it’s just a situation that went pear-shaped early and badly for the Redskins, but the protections against injury that are in the contract for Alex Smith are pretty much just standard stuff.

Thirdly, Jason offers a few ideas for how the Redskins can manage the salary cap hits, but he does not discuss ways in which they can avoid them.

In fact, he starts out the article saying:

The Redskins fully guaranteed Smith $55 million upon signing, including a rather large $27 million signing bonus. All told Washington paid $40 million of that guarantee in the first year of the contract. The $15 million that remains will be paid in 2019. This money is a sunk cost for the Redskins (for the most part,more on that in a minute) and there is no way to avoid the payments.

Fourthly, Jason uses this article to remind us that the NFL is a business, and that it is one that involves collective bargaining. The current Collective Bargaining Agreement has only two years remaining, and there is an expectation of labor action in the 2021 season — very likely a lockout by owners. I wrote an article in July saying that smart NFL front offices would be aware of that looming deadline, and start to use it to their advantage in contract construction. Jason’s article about the Smith situation offers advice to the Redskins front office that shows lateral thinking that involves this expectation of action in the collective bargaining process in 2021.

With those caveats and spoilers in mind, here are the key parts of Jason Fitzgerald’s article, reprinted from the OTC website, with a few comments from me sprinkled in:

The Redskins Options with Alex Smith

As we all know Smith suffered a really bad injury a few weeks ago and has now reportedly had complications in surgery that have made his future even more questionable than before. Smith was in just the first year of a $94 million contract when the injury occurred, so let’s look at what will happen from this point forward.

Smith’s contract was a pretty standard NFL contract.

The Redskins fully guaranteed Smith $55 million upon signing, including a ... $27 million signing bonus. All told Washington paid $40 million of that guarantee in the first year of the contract. The $15 million that remains will be paid in 2019. This money is a sunk cost for the Redskins (for the most part,more on that in a minute) and there is no way to avoid the payments.

Just to clarify, the initial guarantee on Alex Smith’s contract was ‘only’ $55m, made up of a $27m signing bonus, $13m guaranteed salary for 2018, and $15m guaranteed salary for 2019.

Smith’s 2020 $16 million salary is guaranteed for injury at the moment. An injury guarantee means that if a player’s contract is terminated while he is injured his injury protection kicks in and he earns his salary if hurt. The condition to collect on the guarantee is that Smith would not be able to pass a physical in 2020. So obviously that is a long time for Smith to recover from his injury.

A lot of confusion for writers and fans seems to revolve around this $16m guarantee for Alex’s 2020 salary.

There are two guarantees to be aware of with this money:

First of all, the $16m was not fully guaranteed at signing, but it was guaranteed for injury. There are two triggers for this money:

i. The injury guarantee kicks in if Alex cannot pass a physical in 2020, as Jason stated in the article. This means that Alex has about a year and a half from the time of injury to rehabilitate to the point of being able to play. If he can pass a physical by the trigger date, then the injury guarantee will not apply; it will only be triggered if Alex can’t pass a physical in the 2020 offseason.

ii. The second trigger is the one that many people find confusing. Although Alex’s 2020 salary was not guaranteed at signing, it will become fully guaranteed if Alex is still on the Redskins roster on a given date in April, 2019 (a full year ahead of the 2020 season). The only way to avoid that guarantee from being triggered is to cut Alex Smith between now and mid-April. The problem, as Jason explains in the article, is that by cutting Alex, the Redskins will accelerate the remaining guaranteed money from his $71m as dead cap hit immediately (though there are strategies for managing the timing of that dead cap hit).

[Alex Smith’s] $16 million injury guarantee vests on the 5th day of the 2019 league year.

If Washington cuts Smith before that vesting date they do have the ability to escape that $16 million guarantee depending on how Smith’s recovery goes. But the situation gets more complicated when we look at the salary cap implications of cutting Smith.

Smith’s current salary cap number in 2019 is $20.4 million. If he was cut that number would increase by at least $17.7 million, which is the remaining portion of his unaccounted for signing bonus, leaving the Redskins with a $36.6 million dead money charge.

Since Smith would be released with a failed physical termination in March, I believe [the Redskins] should also have to account for an additional $16 million on the cap, regardless of whether ... the injury guarantee is actually paid in 2020 or not. If that is the case in brings the dead money to a ridiculous $52.6 million.

Regardless of whether I’m incorrect on the acceleration of the guarantee, [neither] $36.6 million [n]or $52.6 million is ... feasible for Washington. The team has just $19 million in projected cap room for next year. Take off $17 million for Smith and they have nothing to spend. Add in the extra $16 million on top of that and they are in the worst position of any team in the NFL.

Most fans are aware of the ability to spread cap hits through the use of post-June 1st designation, and Jason points out that, while the Redskins have this tool available, it won’t really make any practical difference for them.

In that situation the Redskins defer the $17.7 million in signing bonus acceleration to 2020. However the guarantee still accelerates so if the injury guarantee does count on the cap that would add $16 million to histotal putting the Redskins right up against the cap. In my mind none of these options are really feasible.

Jason mentions in his article the recent reports of a $12m insurance policy that the Redskins hold against this contract.

This reimbursement is going to give Washington salary cap relief but in my experience there is usually a delay in getting those cap credits meaning they usually come in future years so I don’t expect the $12 million to offset anything significant in 2019.

Basically, Jason is poking holes through all the ‘usual’ fixes to salary cap and dead cap problems.

It seems like the Redskins are in a hopeless situation from an injury that is personally tragic for Alex Smith and very badly timed for the Redskins front office.

Jason discusses an idea or two that could help the Redskins, but which Alex Smith would have no reason to agree to.

Finally, Jason offers up a “make best of a bad situation” suggestion.

Odds are the Redskins are going to have to pay $31 million more dollars and account for $52.6 million on the salary cap for a player who most likely won’t play another meaningful snap for the organization.

If the Redskins reduce Smith’s salary next season to $1 million they can reduce his 2019 salary cap number from $20.4 to $10.275million giving them more money to spend on the season while they have to carry Smith on PUP.

In 2020, if there is no new CBA agreement in place, [the Redskins should do the same thing again] to bring his cap number down to around $15.1 million.

At that point the Redskins will have deferred $27.2 million in cap charges to future years.

While this “kicking the can philosophy” is one I don’t like, this is a unique situation. [The Redskins] aren’t adding money by doing it its just finding a way to shuffle it for accounting purposes.

I cant come up with a scenario where it makes sense to take these massive cap hits in 2019 or 2020.

So, the suggestion here is to convert the maximum possible amount of Alex’s money in 2019 and 2020 from base salary to bonus money, which has the effect of pushing $27.2m into the final two years of the contract.

This simply delays the inevitable, but it also offers a potential opportunity that may or may not eventuate, based on expected action in the collective bargaining process.

[What the Redskins would need to do is] hope is that if there is a lockout [the team] can release Smith in 2021 before a [lockout] becomes official, and potentially escape the $27.2M in dead charges entirely.

Or maybe release [Smith] at the end of the year if [the Redskins] have the cap room to do it in 2020, since a lockout would likely eliminate carryover anyway.

Remember, the Redskins will also be getting some type of credits for Smith [from the insurance policy] because he cant play ... which will help lessen the blows.

At the worst. kicking the money in Smith’s contract allows [the Redskins] to use around 13% of [the] salary cap for the next three years on Smith rather than using 27% ... all on Smith next season....

The goal for Washington at this point now should be to just mitigate the impact on the salary cap and find the best way to account for his money without compromising the way [they are] going to build the team.

That’s it.

That’s the analysis of the impact of the Alex Smith injury on the salary cap, the dead money calculations, and the not-very-promising strategy recommended by Jason to mitigate the damage.

Of course, there’s always the chance that Alex Smith fully recovers and returns to the Redskins roster sometime in 2019. If that happens, most of this discussion becomes moot.

Otherwise, the Redskins face a pretty grim situation on the salary cap front, and can do little beyond delaying the inevitable and hoping for the best.