New MLB CBA Limits Team Building Flexibility as Owners Seize Greater Share of League Revenues

Click here for more information regarding league payrolls, revenues, franchise valuations, amateur signing figures, and more discussed in this article.

Introduction

“Labor peace” is a fragile concept. While the MLB’s owners and players have agreed to and subsequently ratified a new five-year Collective Bargaining Agreement effective through 2021, the league’s latest iteration of the CBA more closely resembles a temporary cease fire with a major showdown likely waiting at its expiration. With major concessions from the MLBPA, including significant restrictions on access to compensation for both domestic and international amateurs and more severe penalties for teams surpassing only a moderately increasing luxury tax threshold, owners are set to unilaterally capitalize on expected continued league-wide revenue growth, exceeding $10 billion in 2016, throughout the term of the agreement.

The players should be applauded for ultimately avoiding a work stoppage and implementing several socially proactive measures. The new agreement’s progressive changes include bans on certain hazing activities, limits on the prevalence of smokeless tobacco, team-funded sports psychiatrists and translators, improved nutrition programs, four additional in-season off days to ease the grind of the season, a stronger domestic violence policy, and greater long-term benefits for retirees (e.g., pensions, healthcare, etc.). Despite these advances, however, the deal lacks few substantive financial victories for the MLBPA while losing ground on several crucial negotiating points.

MLBPA Modest Victory: Change to the Free Agent Qualifying Offer System

The strongest benefit for players in the new agreement involves changes to the free agent qualifying offer and draft pick compensation rules by drastically limiting the opportunity cost to sign another team’s free agent. Instead of sacrificing a first round selection (or a second round choice if the team owned a top ten pick), the new CBA provides for a more complicated determination of the draft pick cost based upon the signing team’s financial standing when signing a player who rejected a qualifying offer from his previous employer. If a small market club who receives revenue-sharing signs such a player, it must sacrifice its third highest selection. At the other end of the spectrum, a team that exceeds the luxury tax threshold must surrender its second and fifth highest draft choices and $1,000,000 in international amateur signing bonus money. Any team that neither receives nor pays the luxury tax must relinquish its second highest selection and $500,000 in international money. Since teams can no longer spend freely on draft picks, the opportunity cost to sign a free agent who turned down a qualifying offer is dramatically reduced, increasing the market for such a player’s services. Further, players may now only be offered a qualifying offer once during their careers and have ten days, as opposed to seven, to consider accepting an offer extended to them from their previous employer.

Under the new CBA, teams losing free agents figure to receive lesser compensatory draft selections, which should also benefit players. Previously, teams received a draft pick following the first round for losing players extended qualifying offers. Now, only teams that lose players who sign contracts valued in excess of $50 million will continue to receive picks after the first round; if under $50 million, the team will either receive a draft selection after the “Competitive Balance B Round,” occurring after the second round, or after the fourth round if the team exceeded the luxury tax. Since fewer teams will surrender higher picks or receive high end compensatory selections, the incentive to retain a pending free agent is reduced. Instead, a team may elect to trade the player during the season to earn a better return if they are out of playoff contention. Players ultimately benefit by likely earning better opportunities to contend for championships, while also eliminating the possibility of receiving a potentially market-altering qualifying offer after the season. Like under the previous CBA, players who are traded mid-season cannot receive qualifying offers from their new franchises.

Other Modest MLBPA Win: Decreasing Minimum Disabled List Time from 15 to 10 Days

During negotiations between the players and owners, several roster structuring proposals presented opportunities for more players to earn valuable Major League service time and access to greater compensation.

A hallmark in the league for the past 50 years, the players and owners successfully negotiated a change to the minimum time a player must spend on the disabled list from 15 to 10 days. After introducing the seven-day concussion disabled list in the previous CBA, the league recognized the benefit of a more flexible disabled list structure to protect players and enable greater roster flexibility. By decreasing the length of the normal disabled list stint, players with minor ailments may now be more receptive to being placed on the disabled list, allowing teams to more readily call up minor leaguers and protect their normal active roster players from further injury. If a team has an off day and does not anticipate needing a fifth starter during a ten day span, it may also decide to place a pitcher on the disabled list to gain an extra position player or reliever. Since players on the disabled list continue to earn Major League salaries, more players may have access to the prorated major league minimum salary, providing an additional benefit for fringe players who would otherwise earn a lesser salary in the minors.

Despite service time gains through changes to the disabled list, the players missed another opportunity to provide more players access to the league’s coffers. The league and players reportedly considered adding a 26th player to the active roster throughout the season, but ultimately decided to retain the traditional 25-man structure. Even if the sides agreed to create an additional roster spot, such a solution may not have presented additional service time for the players given changes to the September 40-man roster system. In conjunction with adding an additional full-time position throughout the season, MLB Commissioner Rob Manfred stated that any change would simultaneously involve a reduction in September rosters when teams may expand their rosters up to 40 players. Transitioning to a 28-man roster in the final month of the year would provide the same net amount of service days throughout the course of the year as the current 25 and 40-man system retained in the agreement. Thus, while the league considered increasing roster sizes throughout the year, theoretically increasing the number of service days available (and access to Major League minimum salaries), it would do so to limit the 40-man system. By keeping the current system, the league retained the same net number of service days represented on the active roster throughout the year while failing to curtail the flawed September call-up system.

International and Domestic Amateurs Continue to Suffer Signing Bonus Suppression

Despite certain gains, the MLBPA failed to protect the next generation of professional players by capping signing bonuses for both domestically drafted players and international amateur free agents. Rather than embrace a free market to pay prospects, as is available for veteran free agents, the MLB has dramatically curtailed teams from offering market-value signing bonuses in the last two CBAs, with the latest changes particularly restricting.

In the previous agreement, the MLB instituted a tax regime penalizing teams for eclipsing predetermined bonus “pools” that varied inversely with team records (i.e., the worst team the previous season would receive the largest pool the following year). If a team exceeded its pool by 0-5%, the league required the team to pay a 75% tax on the overage; if 5-10% in excess, a 75% tax on the overage plus a ban on signing any international amateur free agent for more than $500,000 in the subsequent year. If a team rose above its pool by 10-15%, it had to pay a 100% tax with the same maximum signing bonus ceiling and if over the bonus pool by more than 15%, a 100% tax and a ban on signing a player for more than $250,000 the following year. For premier prospects like Yoan Moncada, the highlight of this winter’s Chris Sale trade, the Red Sox spent $63 million in 2015 to employ his services, with half of the sum devoted to the tax, while accepting the year ban on signing players for over $250,000. In previous regimes, Moncada likely would have received more than the $31.5 million signing bonus he garnered from the Red Sox since the team was willing to shell out an additional $31.5 million in taxes plus the opportunity cost of signing other significant prospects the following year.

Under the new CBA, a deal like Moncada’s is no longer possible. Although every team will start with $4.75 million next year (with up to an additional $1 million available for small market teams awarded “competitive balance” draft picks), exceeding last year’s median of close to $2.5 million, teams are subject to a “death penalty” for circumventing the rules and exceeding their bonus pools. Teams may trade their full allotment, but may only receive up to 75% more than their original sum. Thus, a team may only acquire close to $10 million to spend on international amateur free agents next season. Further, the new bonus limits now apply against international players 25 years and under, up from 23 in the previous CBA, which may inhibit fans from seeing 22-year-old Japanese sensation Shohei Otani for several more years. While players remained adamant about avoiding an international draft throughout negotiations, they may have inadvertently created a worse system for Latin American prospects and communities, particularly elite prospects.

The MLBPA also failed to alleviate spending caps on the domestic amateur draft. Like with international free agency, the previous agreement instituted a tax system on draft spending, a departure from the previous unrestricted system that permitted a free market for negotiating signing bonuses with amateur players selected in the draft. In the 2012 CBA, each draft pick through the first ten rounds received a particular slot value with teams allocated the sum of their selections to spend on their selections in the first ten rounds. Anticipating a loophole, any player signed for more than $100,000 after the first ten rounds would have the portion of his bonus exceeding $100,000 count against the team’s pool. The penalty system also paralleled the international regime: (1) for spending 0-5% over its bonus pool, a team would pay a 75% tax on the overage; (2) for spending 5-10% over, a 75% tax plus the loss of a first round pick in the following year’s draft; (3) if 10-15% over, a 100% tax plus the loss of a first and second round pick in the subsequent draft; and (4) if greater than 15% over their spending limit, a 100% tax and the loss of two consecutive first round picks.

Given the surplus value of premium draft selections, the system proved to be a success in limiting the cash spend on amateur players. Under the 2012 agreement, teams were willing to spend the tax, but unwilling to cross the 5% threshold and surrender draft picks. Although the MLB anticipated that similar tax systems on domestic and international amateur talent acquisitions would adequately suppress the same sort of behavior, the international free agent system incentivized teams to blow past their spending limits to maximize their talent pull in one year before signing penalties kicked in the following year. Essentially, teams were willing to forego signing the international equivalent of a first round pick in one year if they were able to acquire multiple first round talents the previous year, an unavailable tactic in the traditional draft setting. Further, teams also sought less legitimate means to skirt international signing restrictions during their penalized year; the Red Sox, for example, paid several international players represented by the same agent a similar bonus capped at their maximum signing limit, while instructing the agent to redistribute the money to pay certain players more than they were allowed.

While the league felt the need to reform the international system, the domestic draft only received modest changes in the latest iteration of the CBA, none of which particularly benefits the players. In the new agreement, the slot values of top picks have been reduced and spread more uniformly throughout the draft. Although teams at the top of the draft have utilized their position to spend less on top selections to overspend on talented players later in the draft who slipped due to signing demands, deflating the slot value of the top picks further widens the gap in the value top picks provide their franchises compared to the cost to sign them. Ultimately, the amateur talent acquisition process in the new CBA continues to artificially suppress compensation that would otherwise be available to players in a free market.

Stricter Luxury Tax, Boost in League Revenue Likely to Lead to Wealth Disparity Between Players and Owners  

With more money withheld from amateurs, Major League veterans theoretically stand to profit from the remaining resources; however, a more punitive luxury tax, combined with shrewder front office decision-making, will allow owners to capture the fruits of league-wide revenue gains.

Major League Baseball’s greatest difference from other major professional sports leagues remains its prohibition against a salary cap. Often presented as the world’s strongest players’ union, the MLBPA deserves credit for empowering its players with full access to the league’s teams as potential buyers for their services. Unlike other leagues that provide either hard salary caps (e.g., NFL and NHL) or soft caps supplemented with a progressive tax system (e.g., the NBA), the MLB ultimately remained a true free market until the advent of its own luxury tax in 1997. As Fangraphs’ Nathanial Grow discussed, however, the institution of a luxury tax, designed to help foster competitive balance by limiting the spending habits of the league’s richest franchises through progressive tax regimes, inevitably harms the players’ access to a free market. By agreeing to the luxury tax, the players introduced a weapon for the owners to limit the players’ share of revenue.

While internal calculations based on payroll data from Cot’s Contracts and league revenue data from Forbes suggest that the players have obtained approximately 46.4% to 48.3% of league revenues from 2013 to 2015, changes to the luxury tax framework in the new CBA combined with continued optimism surrounding the growth of the league and its business ventures suggest that this estimate will drop. Since the integration of the league’s progressive tax regime, the luxury tax threshold has increased at a slower rate than the growth of revenue. With more resources at their disposal, more teams have crossed the luxury tax threshold and implicated its punitive penalties. Beginning in the 2002 agreement, the league has charged first time luxury tax offenders a 17.5 to 22.5% penalty on each dollar spent over the threshold, 30% for second time offenders, and 40% for teams that exceed the threshold for three or more consecutive years. In 2012, the league added an additional tier, a 50% tax for four-time offenders.

In the newest agreement, the penalties for exceeding the tax threshold are far more punitive. For first, second, and third-time offenders, the league now charges tax rates of 20%, 30%, and 50%, respectively. In addition, teams that spend $20-40 million over the limit must pay an additional 12% tax on all overages, while teams that exceed it by $40 million may be taxed up to 90% on sums exceeding the threshold and also have their first draft selection fall ten spots in the subsequent draft (unless the team selects in the top six, in which case their second pick drops ten positions), sacrificing additional incremental value.

Teams now remain heavily incentivized to comply with the new tax regime. Although the league still allows teams to control their payroll spend, the luxury tax now functions as a de facto salary cap, exacerbated by the premium on crossing the $40 million threshold implicating a draft penalty. In the previous agreement, teams demonstrated a willingness to spend significant taxes while noticeably less interested in harming their access to amateur talent. Although teams sacrificed draft picks to sign certain free agents, teams maintained greater flexibility to recover through the international amateur market. For teams to exceed the luxury tax by over $40 million, they must value the free agent as a difference maker. Since teams can no longer overspend in either the domestic or international amateur market, teams will likely remain apprehensive to implicate new penalties.

Searching for New Team Building Techniques

While teams previously maintained the freedom to invest in international free agents, the domestic draft, and veteran free agency, the new CBA provides far stronger restrictions to creative team building and fostering sustainable winning franchises. In the past, rebuilding organizations may have elected to allocate their resources on premium prospects by spending more in the amateur channels, while major market franchises could focus on established veterans. With caps in place, both franchise building models must find new solutions and identify inefficiencies to create a competitive advantage.

Given the caps on amateur spending, talent evaluation and development remains as vital as ever. Although teams face perilous restrictions on paying actual on-field talent, organizations remain free to spend on scouts, coaches, developers, and front office personnel with successful track records or innovative approaches to identifying talent. Engineering young and cheap talent remains the most efficient model to creating sustainable winning teams.

Since most teams have yet to trigger luxury tax penalties, they may be able to continue to use the free agent market to supplement their current and future rosters. For teams intent on rebuilding without significant expectations for contending, they may be able to offer aging veterans higher than market one-year offers hoping to utilize the players as valuable trade chips to contenders at the trade deadline for prospects. Further, the trading franchise may elect to continue paying the veteran’s salary to help the contending team avoid the tax while potentially returning a greater prospect haul. The free agent market thus may serve as an indirect channel to build an organization’s farm system and acquire young talent.

Conclusion

The new CBA presents an interesting challenge and opportunity for Major League front offices, but the players may have engineered the greatest challenge for themselves. While we should celebrate five more years of labor peace, a more punitive luxury tax regime ultimately restricts players from realizing the benefits they originally expected by limiting amateur compensation. If the league continues to grow as anticipated, the players may seek to challenge the owners for fundamental changes to the league’s labor structure in 2021.

Click here for more information regarding league payrolls, revenues, franchise valuations, amateur signing figures, and more discussed in this article.

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5 thoughts on “New MLB CBA Limits Team Building Flexibility as Owners Seize Greater Share of League Revenues

  1. If the players fought for even a 1% increase of league revenue to go to MiLB players, they would see substantial financial gain. It’s unbelievable this gets ignored over and over.

    Like

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