Article: Report From The Fort: A Market Squeezed

[John Bonnes]

FT. MYERS - The Twins signing of Logan Morrison was sudden and unexpected, but it was the result of forces that have been developing for years and even decades. This historically slow offseason has been analyzed by many, but perhaps none have had more incentive to decipher it than the Major League Baseball Player's Association (MLBPA) Executive Director Tony Clark. Clark sees a double-whammy affecting the free agent market and warned that it might not be a one-time event. His perception of what is happening differs from the most popular narrative.That narrative is that luxury tax is having a huge effect and it is, but “not as much as everyone seems to be pointing too,” says Clark. “The resetting provision that most are now aware of has been in the CBA [Collective Bargaining Agreement] for last three CBAs now.”

 

Clark is talking about some specific parts of the agreement between MLB and the Players Union which is mean to create competitive balance. In MLB, there is a “luxury tax.” If a team surpasses a certain number in overall team salary, they need to pay a tax for every dollar they go over. Last year that number was $196M and five teams were over it.

 

But the percentage taxed gets higher every consecutive year a team exceeds that level. The first year a team pays 20%, the second, 30%, and the third they pay 50%. The “resetting provision” is another way of saying that if a team can get back below the luxury tax threshold, they can reset back to year one of that escalating scale.

 

This year, three of the teams that were over the luxury tax (the Yankees, Dodgers and Giants) worked hard to get back under the threshold for a simple reason: next year there will likely be some VERY good free agents on the market. For instance, if the Yankees want to sign Bryce Harper next year for $40M per year, and almost all of that will be over the luxury tax threshold, they want to pay him $48M ($40M + 20% tax) instead of $60M ($40M + 50% tax). That strategy eliminated at least a few of the most free-spending teams in MLB.

 

Clark is right that the provision has been in the CBA for years. But there are two important caveats. First, payroll has grown faster than the luxury tax level has increased, so what used to affect one or two teams now affects as many as five. The second is that the most recent CBA added some additional penalties for going more than $20M or $40M over the threshold. For $20M, there is a 12% surcharge on amounts over $20M to $40M. There is also a 45% surcharge on amounts over $40M for repeat offenders. Plus, if any team goes over $40M, they can also have their top amateur draft pick dropped back 10 slots.

 

“If teams are treating the luxury tax as a cap, that’s a different world than we ever have been in before,” says Clark. He’s right, and there is a good deal of evidence that for this year at least, there are several teams that are doing exactly that.

 

But Clark doesn’t see it as a major affect for a couple of legitimate reasons. First, even if you count the two teams over the cap (which one might, considering how damaging those new surcharges are), it’s only five teams. Second, two of those teams – the Yankees and the Red Sox – acquired very expensive players this offseason, which suggests only three teams were frozen.

 

Far more damaging in Clark’s mind is the opposite end of the spectrum. He sees as many as three times that many teams cutting salary and not seriously competing in 2018. His reasoning is solid, but this is also a result of provisions in the CBA to enhance competitive balance.

 

There are two very good reasons for MLB teams to slash payroll even if it means being uncompetitive. The first, is that being a bad team returns good draft picks and those picks can fuel a high-level resurgence in the future. This method was popularized most recently by the (World Champion) Houston Astros. And that doesn’t even count prospects a team might receive from trading away their veteran talented players.

 

But the second reason might be even more compelling. Those teams with the lowest payroll and least revenue tend to receive more money from revenue sharing. It is extremely profitable for a team to stink. And after stinking, hopefully they have accrued enough talent to not just make the postseason but be favored.

 

This has two big impacts, both of which hurt the market for free agents. The obvious one is that it reduces the demand in the marketplace. Between the teams that are passively (or actively – I’m looking at you Miami) tanking and the teams being careful of the luxury tax, there are really only 17 or so of the 30 teams that are trying to sign free agents.

 

The second impact is that selling off players to reduce payroll increases the supply of players in the market. A prime example was the Marlins shopping slugger Giancarlo Stanton at the beginning of the offseason. He ended up being the one big salary the Yankees took on this year, and then they were no longer in the market for free agents.

 

So the tanking philosophy creates a double-whammy to the market, affecting both the supply and demand side. It’s no wonder the prices on free agents dropped precipitously. “That’s why this is different,” says Clark. “That’s why when you take the talent that’s being moved, when you take the revenue sharing dollars that are being accessed, and you flood the system [with players] while removing a number of teams that appear to not being interested in winning today … it creates some challenges.”

 

When you look at those forces, it is not clear that this is a one-year blip only due to next year’s free agent market and a few high-end teams shedding payroll. “When there are concerns across multiple levels to the competitive integrity of our system and how it’s manifesting itself – that’s not going to go away overnight,” warns Clark.

 

And the forces that drive it are not likely to change until the next Collective Bargaining Agreement is negotiated. That’s four seasons away. The market that produced Logan Morrison might not be as short-lived as it appears.

 

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[Old Twins Cap]

Nicely reasoned and credible.

 

Reduce both supply and demand and you have a prescription for less FA activity.

 

What can and will Baseball do to address this?

 

The incentive to tank is real and not actually that big a deal financially, especially if you have a solid base of fan support.

 

But, it means that you only have a certain number of teams "in it" every year and they become "super teams" by dint of scooping up the best players from the teams that are tanking.

 

And, of course, the schedule is unbalanced making it that much easier to win divisions or wild cards by being in the right place at the right time.

 

This will need to be addressed.  Somehow.

[Duke Powell]

Clark’s reasoning is solid. John Bonnes does an excellent job reporting on a difficult and nuanced subject.

 

 

Couldn’t help, though, to note the multiple references to the “market.” To that I offer a question.

 

 

What type of “market” can support busineses that “tank” and “stink” without the threat of bankruptcy or closure? Indeed, what type of market provides a guaranteed reward for offering a non-competitive product.

 

 

Government is the only answer I can come up with.

[dbminn]

 

Clark’s reasoning is solid. John Bonnes does an excellent job reporting on a difficult and nuanced subject. Couldn’t help, though, to note the multiple references to the “market.” To that I offer a question. What type of “market” can support busineses that “tank” and “stink” without the threat of bankruptcy or closure? Indeed, what type of market provides a guaranteed reward for offering a non-competitive product. Government is the only answer I can come up with.

 

The 1955-1960 Kansas City Athletics did a fine job of tanking and taking profits back when they were called the "farm club" for the New York Yankees. (Here's an article that describes the trades).

 

Bigger picture, the "market" was more than willing to conscript players to a team, without free agency. Better that small market teams stink and squeeze player salaries than compete. Free agency finally arrived through the courts (government). Profits and competitiveness have been a lot better since then.

[Platoon]

I think these are all valid points that John has reported Tony Clark believes affect the market. But I am surprised the issue of more analytical FO's and their supposed cooling on the practice of buying the last 3 good years of a veteran player, with a 6 year contract was not part of the discussion. i think to an extent that will continue to lower contracts, or at least lengths of them. As for tanking, that is common in other sports. Revenue sharing can be a factor. But as long as drafting in inverse order is in place, there will always be a race to the bottom. The NBA has done it for years. Different league, same issue. And they buy and sell contracts like commodities as well. There were a lot of moving parts to this years FA market, which was already weak at best. It might take a couple years to see if Clark is right. But I do think there is a change in philosophy in the majority of FO. More executives believe they can win by being smarter, not richer. That may well be a factor in changing contract structure. But sooner or later the fact that being smarter, and richer is even better, than just being smarter, will again become evident. That doesn't mean 6 year contracts for 32 yr. old pitchers will continue, but it does mean that someone will still be overpaying for players services, just possibly for shorter lengths of time.

[Cap'n Piranha]

I agree that GM’s who understand it’s better to pay a 25 year old 500k for 80% of the production you get from a 30 year old making 10M is a big part of the equation not being addressed. That will only change when that 20% becomes the difference between 85 and 90 wins, rather than 75 or 80.

 

Alternatively, MLB could expand the playoffs to 8 teams, and do actual series, rather than one gamers. Do best of 3 in the first round, best of 5 in the second, and best of 7 for the LCS and WS. This gives more teams not only playoff berths, but a more meaningful playoff experience, which makes the 20% referenced above impactful to a lot more teams.

[laloesch]

Fine lets just do away with the luxury tax and let the Yankees, Red Sox, Cubs, Giants, Dodgers, Phillies spend whatever they want and get all the premier free agents and leave the bottom half of the league as AAAA farm teams for the top 8-10 franchises.  That's how it was before any of this started. 

 

I'm fine with that.  Is everyone else okay with that?

Edited March 5, 2018 by laloesch

[Tommygun921]

Teams that aren't competitive aren't going to turn into playoff teams by signing mid level prospects like the Twins tried to do from 2011-16. It can do the opposite. Keeping them down longer. So it doesn't pay to spend money when it ultimately won't make a difference. Could take them from 30th to 20th or 25th. Which just moves them further down the draft list, waiver wire, and less international money. (I think) Plus teams are wising up to these long term contracts not paying out. They make it harder for teams to keep that winning window open longer when you're over paying aging players that get hurt or production fades.

[Otto von Ballpark]

Clark and the MLBPA just filed a grievance against 4 teams for not spending revenue-sharing money: Rays, Pirates, Athletics, and Marlins.

 

According to Cot's, the Rays have a record-high opening day payroll this year ($77 mil, up from $70 mil last year).

 

The Pirates are only down about 10% ($95 mil to $85 mil). They've been over $90 mil the previous 3 seasons, but are coming off seasons of 78 wins (2016) and 75 wins (2017).

 

The A's are coming off a franchise-record 3 year payroll from 2015-2017, and last-place finishes in each season. They are down about 28%.

 

Despite their fire sale, the Marlins are just shy of $90 mil payroll too. Easily the 3rd highest payroll in franchise history, after only 2017 and 2012.

 

Historically, none of these teams consistently sign even mid-level FA talent (the Marlins might be closest, but even that has come in bunches), so they're not likely having a serious effect on players going unsigned. Maybe the availability of Gerrit Cole had an effect on the SP market earlier, but a small number of quality players getting traded isn't really new to the offseason market either.

 

If this is an indicator of how Clark and the MLBPA will articulate their collusion case, it's not a good sign.

[Dman]

That a was a well articulated article.  I have been saying market forces are at work for a while now.  As outlined above tanking along with the luxury tax has really changed the market more than I would have imagined.  With less competition for FA's there becomes no reason for 6 or 7 year deals where teams know they will be paying for two or three unproductive years.  Also with analytics as good as they are these days the FO can see the risk reward factor for older players is high and typically doesn't work well especially for teams with lower payrolls. 

 

I guess tanking is the only way to fight back for teams with smaller payrolls.  I would also guess the whole salary structure is about to be changed.  With little statistical leverage for agents to promote veteran salaries I think we will see changes to the salary structure for players in their prime years.  Perhaps something like teams will still get three years of low salary but the arb years will either need to be shortened or their will be pressure for arb salaries to rise higher.  Enjoy this CBA while you can as I feel tough changes are ahead.

[Otto von Ballpark]

 

But Clark doesn’t see it as a major affect for a couple of legitimate reasons. First, even if you count the two teams over the cap (which one might, considering how damaging those new surcharges are), it’s only five teams. Second, two of those teams – the Yankees and the Red Sox – acquired very expensive players this offseason, which suggests only three teams were frozen.

This understates it.

 

Considering that incentives and midseason acquisitions will also count against this cap, 9 teams (those with $26 mil or less of cap space) might completely lose all flexibility just by adding one more player around the qualifying offer salary of $17.4 mil. That's going to have a big effect on the market.

 

https://docs.google.com/spreadsheets/d/e/2PACX-1vRghSG2xROOkgctuzj56pUSP6zCxUUQ1i7LND0jnficQ0TPtIY8OhNl3AN_StqMvBCHnO_qOXKZeTbE/pubhtml

[Dman]

 

Clark and the MLBPA just filed a grievance against 4 teams for not spending revenue-sharing money: Rays, Pirates, Athletics, and Marlins.

 

According to Cot's, the Rays have a record-high opening day payroll this year ($77 mil, up from $70 mil last year).

 

The Pirates are only down about 10% ($95 mil to $85 mil). They've been over $90 mil the previous 3 seasons, but are coming off seasons of 78 wins (2016) and 75 wins (2017).

 

The A's are coming off a franchise-record 3 year payroll from 2015-2017, and last-place finishes in each season. They are down about 28%.

 

Despite their fire sale, the Marlins are just shy of $90 mil payroll too. Easily the 3rd highest payroll in franchise history, after only 2017 and 2012.

 

Historically, none of these teams consistently sign even mid-level FA talent (the Marlins might be closest, but even that has come in bunches), so they're not likely having a serious effect on players going unsigned. Maybe the availability of Gerrit Cole had an effect on the SP market earlier, but a small number of quality players getting traded isn't really new to the offseason market either.

 

If this is an indicator of how Clark and the MLBPA will articulate their collusion case, it's not a good sign.

Good info Thanks for that.  I was wondering how teams tanking would work with revenue sharing.  My thought not having numbers was that tanking teams wouldn't need revenue sharing if they were not going to spend the money.

[John Bonnes]

 

This understates it.

 

Considering that incentives and midseason acquisitions will also count against this cap, 9 teams (those with $26 mil or less of cap space) might completely lose all flexibility just by adding one more player around the qualifying offer salary of $17.4 mil. That's going to have a big effect on the market.

 

https://docs.google.com/spreadsheets/d/e/2PACX-1vRghSG2xROOkgctuzj56pUSP6zCxUUQ1i7LND0jnficQ0TPtIY8OhNl3AN_StqMvBCHnO_qOXKZeTbE/pubhtml

 

That's a good point, and I asked Clark about whether teams gradually approaching the cap is having an effect, given payroll growth has exceeded luxury tax level growth. He admitted we saw five teams go over last year but still thought the bigger issue is the lower end of the market. I'm not so sure I agree. He did admit there were a number of teams withing about $20M of the cap limit. 

[Otto von Ballpark]

Just perusing Cot's, 12 teams have record opening day payrolls for 2018 right now, including the Twins. Another 11 have top ~4 highest payroll in their franchise history (i.e. KCR). Another 5 are basically coming off record payrolls within the last 3 years (OAK, TEX, DET, NYY, and LAD), and while they have all cut payroll for 2018, they are not currently "low" by market expectations (except perhaps due to the luxury tax for NYY/LAD).

 

That basically leaves the Phillies and the White Sox. I guess both could stand to spend more in 2018 given their market, but both have spent pretty recently and also have well-respected baseball operations departments, so they get some benefit of the doubt if they don't want to spend quite yet coming off 66/67 win seasons.

[Dman]

 

Just perusing Cot's, 12 teams have record opening day payrolls for 2018 right now, including the Twins. Another 11 have top ~4 highest payroll in their franchise history (i.e. KCR). Another 5 are basically coming off record payrolls within the last 3 years (OAK, TEX, DET, NYY, and LAD), and while they have all cut payroll for 2018, they are not currently "low" by market expectations (except perhaps due to the luxury tax for NYY/LAD).

 

That basically leaves the Phillies and the White Sox. I guess both could stand to spend more in 2018 given their market, but both have spent pretty recently and also have well-respected baseball operations departments, so they get some benefit of the doubt if they don't want to spend quite yet coming off 66/67 win seasons.

 

So bottom line you don't see tanking as having much affect but with more teams up against the luxury tax there is now an over supply issue because they simply cannot afford to take on more salary without incurring penalties?  

[Tom Froemming]

I think they assumed the big market teams would continue to spend over those thresholds despite the penalties. And, to be fair, that's how it's worked up to this point. I think if anybody is hurting the free agent market this year, I think it's these major market teams who are insisting to stay under the threshold.

 

I'd be willing to bet the Dodgers and the Yankees will be investing a smaller percentage of their revenue into payroll than most of the other teams in the league. Yet the union has filed a grievance against some of the smaller market teams for not properly spending their revenue sharing money.

 

Well, you've put caps on draft and international spending, and those teams are never going to convince top free agents to sign, so what are they supposed to do? Sign a bunch of the second-tier free agents to terrible contracts? I guess they could try to funnel that money into extending their young players, but a lot of players and their agents want to get to free agency.

[Thrylos]

There are a few things that should be under consideration:

 

- The Astros of the last 2-3 seasons legitimized the reasons why teams should try to get as many top prospects as possible, play them to figure out who are the best and then when close to their prime, supplement them with talent to close holes and win.  Sorry, this might be regarded as "tanking", but the Astros won more World Series than the Yankees this decade.

- Indeed the salaries (top and median) grew much faster than the luxury tax threshold, which in every market makes it a need for correction

- There are way too many bad contracts.  They were back in the day as well, but the poster boys of those bad contracts then (7/$126M to Barry Zito, and 8/$121M to Mike Hampton) do not look horribly out of place now.  They are about half of the Cano, Pujols, A-Rod, Cabrerra, Stanton contracts.  Yet another market correction about how much you pay players about to retire happened. 

- Front Offices got smarter.  There is a huge difference between a 6 win player and a 3 win player.  Previous front offices did not get the concept of value and were willing to overpay for those aging 3-win players.  Not any more. Lynn, Cobb, & Arietta are caught in this situation,  esp. now that the savvier FOs realize that a 1st or 2nd round draft pick as a prospect might worth some $.  The Qualifying Offer hurt the players more than it helped them...

- The best thing that can happen for baseball right now, it would be if one of those "tanking" clubs made it to the post-season (not unlike the Twins did last season) based on what they get from their prospects...

[Mike Sixel]

Tony left off the part where he's just not good at his job....

 

How is it tanking? If you are a bad team, and you can't make the playoffs, how is it not just smart business not to sign mediocre players with little upside? If only the local team had realized this, and acted differently.....

 

A floor helps no one. Raising the minimum does. Paying minor league players does. But a floor does nothing.

[Otto von Ballpark]

 

That basically leaves the Phillies and the White Sox

Responding to myself...

 

The Phillies do indeed have a low payroll this year, relative to their historical levels, but they were one of the fastest movers on the market this winter in landing Carlos Santana, Tommy Hunter, and Pat Neshek. They have a lot of promising players breaking in all over their roster. I suspect they could still use a pitcher, and indeed they have been rumored in talks with the remaining SP, particularly Arrieta and Lynn. (And they spent $17 mil on Jeremy Hellickson last winter, so they're clearly not averse to some investment there.) But they have enough ready young SP, they could always add a Jaime Garcia type midseason.

 

The White Sox could definitely use a CF but the FA market wasn't very strong at that position -- basically just Cain, who got a market deal from the Brewers. They probably should have gone after Gomez. But like Philly, they've got a lot of promising players breaking in right now, especially in the rotation.

[Loosey]

I can see this happening again next year. 

 

I will guess the big names, Machado, Harper, etc will go early and for high dollars.  But then those big spending teams will be done and we will be back in the situation we are in again today. The teams that just crossed over the luxury tax will not want to go too far over and start spending 20% premiums on every guy they sign.  Instead the market will be left with the middle market teams again not meeting the demands of guys wanting 6 year $120M+ deals.

[Jacksson]

Also needing to be mentioned are the trend of: trading away bloated long term contracts for prospects and a bad short term contract (Giants - Rays) as well as trading away a desirable prospect along with a bad contract to clear it from a team's  books (Brandon Moss), or bad contract for bad contract (Matt Kemp)..

 

From a team standpoint, teams need to stop drafting HS players.  They: take too much time to develop, cost more to develop and don't go through the 4 year shaking out process that graduating college seniors do.  They all too quickly reach the decision point of having to be protected on the 40 man roster from the Rule 5 draft and/or reaching minor league free agency.

 

For Mr Clark, it's high time to challenge the obsolete, random player numbers associated with the game and to update them for what makes sense in today's environment.  Why is it still a 25 man roster?  It should be 28.  Why is it a 40 man roster?  It should be 45 - or at the very least, low revenue teams should be favored with a higher roster limit as they are more reliant on their farm system.  Teams should not be put in the position of "giving away" a player of promise/value on waivers, just because the team needs to add a player to the 40 man roster.   These are antiquated, random number limits that are no longer of relevance in today's game..  

Edited March 5, 2018 by Jacksson

[specialiststeve]

Always going to be an issue. The owners are smart in that they are not just going to spend to get a "little" better and lose money.... not a good strategy. I am cheap as hell and understand that if product "A" is 15% better than Product "B" but 30% more cost the cost ratio is not worth it.  Period. 

 

As fans we always  want the best product out there but most understand that this IS a business and owners are going to look at the financial end first.

 

The good news for smaller market teams is  that the "cost" of FA has come down and picking one here and there to fill needs is more attainable. Not what the MLBPA is looking for but for the owners and the fans it likely a better situation.

 

Simple supply and demand economics.

[nicksaviking]

Free agency used to be the time where everyone got excited for shiny new presents. I think a lot of teams aren't viewing them as so "shiny" and "new" any more. Most of these guys are fairly average vets "shiny" and "new" now applies to the youngsters already in the organization and when you look at the financial demand of the vets, expecting these guys who are relocating to a new organization, a new city, a new stadium, a new manager and new teammates, the odds of them being significantly better than the young guys in the system probably isn't all that good.

[Mr. Brooks]

Also needing to be mentioned are the trend of: trading away bloated long term contracts for prospects and a bad short term contract (Giants - Rays) as well as trading away a desirable prospect along with a bad contract to clear it from a team's books (Brandon Moss), or bad contract for bad contract (Matt Kemp)..

 

From a team standpoint, teams need to stop drafting HS players. They: take too much time to develop, cost more to develop and don't go through the 4 year shaking out process that graduating college seniors do. They all too quickly reach the decision point of having to be protected on the 40 man roster from the Rule 5 draft and/or reaching minor league free agency.

 

For Mr Clark, it's high time to challenge the obsolete, random player numbers associated with the game and to update them for what makes sense in today's environment. Why is it still a 25 man roster? It should be 28. Why is it a 40 man roster? It should be 45 - or at the very least, low revenue teams should be favored with a higher roster limit as they are more reliant on their farm system. Teams should not be put in the position of "giving away" a player of promise/value on waivers, just because the team needs to add a player to the 40 man roster. These are antiquated, random number limits that are no longer of relevance in today's game..

While sometimes an issue for 16 year olds, I'm not sure the Rule V is an issue at all for 18 year olds.

[Riverbrian]

 

That's a good point, and I asked Clark about whether teams gradually approaching the cap is having an effect, given payroll growth has exceeded luxury tax level growth. He admitted we saw five teams go over last year but still thought the bigger issue is the lower end of the market. I'm not so sure I agree. He did admit there were a number of teams withing about $20M of the cap limit. 

 

Mr. Clark is getting me a little concerned. From a distance I'm starting to think that the players need new labor lawyers. 

 

The Competitive Balance Tax and the sheer numbers of low budget teams are both important factors in my opinion. Trying to determine what is the bigger issue is like trying to decide if it's the Cold Air from Canada or the Warm Air from the Gulf that is more important in the formation of the tornado that ripped through your Barn. 

 

From a distance... IMO...  Tony Clark should probably try deflect any talk about the Competitive Balance Tax penalty increases because Tony Clark traded that for lesser draft pick compensation for the handful of players who rejected the QO. That's a bad trade... Tony Clark got beat. 

 

Jason Castro signed a 3 year 24M dollar deal and a year later Jonathan Lucroy just got a 1 year deal at 6.5m from a tanking team and that kind of says a lot. 

 

The Yankees could use a Jake Arrieta or Mike Moustakas.

The Dodgers could use a Jake Arrieta.

The Giants could use a Jake Arrieta or Eric Hosmer. 

The Nats could use a Jake Arrieta or Johnathan Lucroy or Greg Holland

The Cubs could use a Greg Holland or a Wade Davis for that matter. 

The Angels could use a Jake Arrieta, Lance Lynn or Alex Cobb

The Mariners have needs... so do the Blue Jays. 

 

Where are they? 

 

Clark can blame the tanking teams all he wants but the tanking teams just signed Moustakas and Lucroy.