The LA Rams, the salary cap, and the time-value of money

About a year ago, I wrote a piece entitled, “Les Snead, the Rams, and the folly of chasing “windows.”” It was a little over 1,500 words dedicated to how I thought that Snead and the LA Rams were being irresponsible - over the long term - in the manner that they were building the team, by trading away high draft picks and spending like it was going out of style. I ended the piece thusly:

While one, perhaps final, gamble has been placed on Matt Stafford, the Rams’ window continues to close, and given the way Les Snead has chosen to built the team, it seems unlikely to open again any time soon. For Snead and the Rams, it’s either Super Bowl or bust or Super Bowl AND bust.

Well, as we all know - at least in 2021 - Snead’s gamble paid off, and the Rams won Super Bowl LVI 23-20 over the Cincinnati Bengals.

And, while the Rams have zero draft picks in the top 100 in 2022, they have continued to spend massively in free agency this offseason, mostly recently locking up former All Pro linebacker Bobby Wagner to a 5-year $50M contract.

So how are they pulling this off?

Time-Value of Money

Many readers may be familiar with the concept of the “time-value of money,” but for those who aren’t, it’s a fairly simple idea: A dollar now is worth more than it will be at some future time. In a general economic sense, this is true because factors like inflation and cost of living increases are constantly, slowly driving down the value of any individual sum of money.

In the odd economic environment of the NFL’s salary cap, an additional element is added, one that may make that de-escalation of value even a bit more reliable. Let me use a concrete example to explain. From 2021 to 2022, the salary cap expanded from $183M to $208M, a roughly $25M increase in absolute value, and a 14% increase overall.

It was an unusual year, and something of a correction from the COVID-impacted 2021 cap, but as a point of comparison, the 2023 cap is expected to grow to around $223M, about a 7% increase, which is more in line with past growth, pre-COVID, and taking into account the massive new TV deals signed by the league, one that can be expected for the next decade or so.

But back to the example above, a contract dollar in 2021, in effect, cost a team 14% more than that same dollar would have had it been pushed into 2022. And, it cost 22% more than it would have pushed in 2023. If we assume another 7% escalation to the 2024 cap, the cost of that 2021 dollar increases to 30% higher. That, in effect, means that if we can juggle around the cap hits for a player over a sufficiently long horizon, say 4 or 5 years, we can dramatically drive down the actual value - in cap terms - of what they are being paid. Again, let’s use a simple example (in terms of 2021 dollars):

Player 1 - Two year contract worth $10M ($5M AAV)

• Year 1 (2021) - $5M
• Year 2 (2022) - $5M (but the cost in 2021 adjusted dollars is about $4.3M)

Player 2 - Four year contract worth $10M with two void years

• Year 1 (2021) - $2M
• Year 2 (2022) - $3M (but the cost in 2021 adjusted dollars is about $2.58M)
• Year 3 (2023) - $5M (but the cost in 2021 adjusted dollars is about $3.9M)
• Year 4 (2024) -$0M (these charges are initially assigned to 2024, but accelerate into 2023 at the beginning of the void period)

These contracts pay the player the exact same amount of money ($10M), but Player 1 costs the team about $9.3M in 2021 dollars, while Player 2 costs his team around $8.48M in 2021 dollars — about 10% less — just as a result of creative contract structuring. Follow this philosophy across an entire roster, with an eye towards optimizing it, and it’s easy to see how it could functionally create another $15-20M in effective cap space in a single year.

I also tend to think that most of the “intuitive” drawbacks of this approach - most notably that it starts consuming cap space in future years - are oversold. Once one sees the cap for what it is - in effect a series of reliable, annual (growing) payments to an account whose balance keeps rolling over - the notion of “annual caps” begins to break down. Yes, there are annual spending limits that need to be met. Yes, there’s an annual amount that can’t be exceeded in that year, but that can be easily end-run by pushing some of those reduced-value dollars into future years.

At this point, I hear a second objection: “Now you’re just spending like a kid with a credit card. Eventually those payments are going to catch up with you.” But, unlike credit card payments, borrowing from future cap dollars doesn't accrue interest. In fact, it’s just the opposite, the longer you push those payments out, the less - in practical terms - you end up having to pay. Remember, that 2021 dollar is going to cost you around $.70 in 2024. In many respects, it would be foolish not to push those payments out as far as you could.

Let’s Look at Recent Rams’ Contracts

Looking at Overthecap.com, Matt Stafford’s deal is structured in the following way:

• Year 1 (2022) - $13.5M (all guaranteed) - 2022 dollars - $13.5M
• Year 2 (2023) - $20M (all guaranteed) - 2022 dollars - $18.6M
• Year 3 (2024) - $49.5M ($18.5M guaranteed) - 2022 dollars - $41.6M ($15.5M)
• Year 4 (2025) - $50.5M ($23.5M guaranteed) - 2022 dollars - $39.9M ($18.6M)
• Year 5 (2026) - $49.5M ($23.5M guaranteed) - 2022 dollars - $35.1M ($16.7M)

So, the nominal value of the contract is $183M over 5 years, while the adjusted cost is around $149M 2022 dollars over 5 years.

The first thing that Snead has done here is the easiest, just brute force the next couple of years down - essentially - to a pro-rated bonus and nominal salary. He’s pushed the big payments into the last three years of the contract, which, if Stafford sticks around and plays reasonably well, will look affordable.

The contract, as structured, also gives the team a pretty easy route to a Year 3, post-June 1 cut if things don’t work out, dividing the dead money between years 4 and 5 and opening up $32m in cap space immediately. Another option would be for the Rams to trade Stafford after year 3, on a 2-year deal of around $31.5M AAV that might be attractive to a potential suitor.

But let’s see what else Snead’s doing. Allen Robinson’s recent contract is structured a bit differently, a 5-year deal with 2 void years:

• Year 1 (2022) - $4.3M - 2022 dollars - $4.3M
• Year 2 (2023) - $18M - 2022 dollars - $16.6M
• Year 3 (2024) - $18.5M - 2022 dollars - $15.5M
• Year 4 (2025) - $5.6M (void year) - 2022 dollars - $4.3M
• Year 5 (2026) - $0M (void year, these charges accelerate in 2025 after 2024)

Again, the nominal value of the contract is $46.4M over 5 years, while the adjusted cost is around $40.7M 2022 dollars over 5 years.

So again, Snead has pushed the big hit out of the first year, with essentially a well below market rate deal for Robinson in years 2-3, where Snead’s effectively saved himself about $2M per year just as a result of the dollar devaluation, and then pushed a little more void money into years 4 and 5, where he’s gotten around a 23% discount on his cap dollars.

Mark J. Rebilas-USA TODAY Sports

This salary structuring above has been augmented by moves that effectively swap draft capital for salary cap hit, such as the Rams’ late season trade with the Broncos for Von Miller. In what amounted to a three month rental for around $700k, the Rams sent Denver a second and a third round pick for Miller, who had already cost the Broncos over $21M in 2021. (This fungibility of draft picks and cap dollars will be explored in a future piece).

Miller was recently signed in free agency by the Bills, and generated 5th round comp pick capital for the Rams on the backend. This loss of draft picks is where I worry the Rams’ approach could go sideways, but as long as they can keep generating compensatory picks (they currently have 4 projected for 2023), they may be able to minimize the damage in this realm as well.

From a salary structuring perspective, it appears to me that what Snead has stumbled upon is really a variant of the approach described above that has given him a dramatic leg up on the competition, because he has recognized that, within reason, there is no time like the present to get the best value for his dollars.

One of the key tenets that flows from the idea of the “time value of money” is that “an investment delayed is an opportunity lost.” My impression is that, while many GMs are fastidiously ensuring that their books are fairly balanced from year to year, Snead is taking the approach that failing to mobilize those future dollars in the present is a huge missed investment opportunity, and I'm not sure, at this point, that I can disagree with him.

This piece should not be taken as a defense of spending wantonly on expensive free agents - I’m still a huge advocate of a value-based approach - however, it should be considered a defense of teams fully utilizing the accounting tools in place to optimize their cap resource in order to field the best teams they can. If Washington wants to sign Daron Payne, Terry McLaurin, and Cole Holcomb, this is precisely the approach they should use, without delay.

I would like to thank Bill-in-Bangkok for some much appreciated editorial feedback and improvements to this piece.