By Ed Botti
December 18, 2022
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The 2022 free agent market out performed what most experts predicted, just a few short months ago. The key to this spending spree actually began last December 1. That was day 1 of the 2021/2022 --99 day lockout.
Many of us picked a side. I for one kept going back and forth on who I sided with.
When I look at the money being spent so far this offseason, I realized why the owners locked out the players until a new collective bargaining agreement (CBA) was signed.
As they should be, they were looking ahead and trying to figure out a way to navigate through free agency waters.
When the smoke cleared last March 10 and the lock out ended, the new CBA yielded significant changes to player compensation including the pre-arbitration bonus pool rising and how much teams can spend before having to pay into MLB’s revenue-sharing pool.
How does that revenue sharing pool actually work?
It is commonly referred to as the Competitive Balance Tax or “CBT”. Call it what you like, but essentially it is a form of a cap. Albeit a “soft cap”.
The CBT imposes a fee on the owners of teams that exceed a floating payroll threshold each season. In 2023 the threshold is $233MM, and it will escalate each year during the 5 year CBA.
They added a little creative accounting to the mix. A team's CBT is not calculated by what the team’s players actually will make in a particular season, it is calculated using the average annual value of the player’s contract.
What does it actually do?
To start, let’s look at it from 1,000 feet.
As it is done in politics many times, the name of something is designed to confuse.
They use the words “competitive” and “balance” in the full name. But it cannot secure competitive balance if there is not a system in place to guarantee that the proceeds improve competition.
It does not force a small market team to sign a premier free agent, or invest in their own players so where is the competitive balance?
Then they go and add the word tax, and treat it as a luxury tax. But that doesn’t fit either.
Luxury taxes are a tax on products not considered essential.
Labor costs in a labor-intensive business aren’t really a luxury good.
Players are no more of a luxury to a pro sports team than tomatoes are for a pizzeria.
MLB’s position is that the CBT is needed to increase competitive balance. If you look at the teams spending and the amounts being spent, I see no evidence whatsoever that any competitive balance has been achieved, in fact, you could make a strong case that it actually does the exact opposite.
Here is how the dollars flow.
Team salaries between $233MM -250MM the teams pay 20% (30% for teams exceeding that amount at least two years in a row).
Team Salaries between $25MM0-$270M the teams pay 32% (42% for serial spenders).
Team Salaries between $270MM - $290MM the teams pay 62.5% (65% for serial spenders).
At the top of the tax chart is what some are now calling the “Cohen tax”, named after Met’s owner Steve Cohen. Team Salaries exceeding $290MM pay 80% (90% for repeat offenders).
In reality it is a soft salary cap, which simply means there is no floor, and it is not tied to league revenue, it is tied to what players and agents are able to negotiate out of owners.
It is clear that many teams are adhering to a vigilant spending approach, others, such as the Yankees and Mets, are spending at levels never seen before.
The Yankees won the Aaron Judge lottery by signing him to a nine-year, $360 million contract. In case anyone cares, that is the largest average annual value ($40MM) for a position player in history.
They then added Carlos Rodon to a six year $162MM deal.
Three shortstops (Trea Turner, Carlos Correa and Xander Bogaerts) have all signed deals in excess of 11 years long.
The longer term contracts spread out the average annual value, which helps teams when it comes down to the CBT.
Teams in a win now mode are relinquishing a shrinking percentage of salary space later, by extending player contracts into the player’s late 30s when the teams know that the players most likely won’t be worth it anymore, so they have more money now.
The Yankees' projected 2023 team payroll (which includes estimated arbitration salaries and estimated pre arbitration salaries) sits at $270MM up from $264MM in 2022.
As we stand today, they will have a $9,800,000.00 “tax” to pay, which when added to the actual AAV of $270MM, they are on the hook for $279,800,000 in 2023.
The Dodgers and their $310,000,000 2022 Payroll would be on the hook for $47MM.
Essentially the Dodgers CBT is equal to the Orioles and A’s total payroll.
Does that really accomplish a competitive balance?
Where does this money go and how is it used?
Since there is no way for MLB to guarantee that the proceeds improve competition, the CBT is nothing more than a con or a ruse.
The CBA states “each Club shall use its revenue-sharing receipts (including any distributions from the Commissioner’s Discretionary Fund) in an effort to improve its performance on the field.”
The commissioner is given power over teams that do not comply, but the burden in a grievance is on the MLBPA to prove that the team did not comply. That is a very hard to prove, and the commissioner has not shown any plans to enforce it.
Why should he? He works for the Owners.
The system itself is flawed.
Each team shares 48% of its local revenue. Teams that receive CBT money, such as the Pirates and A’s have no real motivation to put revenue-sharing dollars back into their team.
Why would they turn a $20 million subsidy into $30 million if you’re going to have to give back half of it anyway? That would make no sense, from a purely economic perspective.
For the larger market teams, it also has it benefits. Let’s say when the Yankees have to contribute that $9.8MM next year, I would bet that they would rather see it go into the bank accounts of Robert Nutting in Pittsburgh or John Fisher in Oakland than be paying the same and have those teams work against them and acquire players they want.
Remaining free agents such as Dansby Swanson will be advanced by a market that has seen almost every premier free agent signed by Christmas to deals that exceeded most expert predictions.
I don’t see this changing anytime soon, as next year’s free-agent class might include a pair of elite third basemen if the Red Sox don’t extend Rafael Devers and Manny Machado exercises his opt-out.
It doesn’t end with the superstars either.
One group of players that is massively cashing in this off season are the middle of the rotation starting pitchers.
When the Phillies signed Taijuan Walker and the Cubs signed Jameson Taillon to 4 year contracts they both surpassed their projected contract totals by 80% and AAVs by 40%.
Why are middle of the rotation, inning eating starters seeing their value rise?
Factors such as the effects of the new pitch clock and MLB putting a limit on how many pitchers each team can have on their 26 man roster is opening up an opportunity for middle rotation starters and they are cashing in on team’s concerns about reliably building a rotation.
I will say this, the fast moving market is probably good for the game.
A vigorous pace for the free-agent market fires up the hot stove and lets fans' winter discussions focus on lineups, batting orders and predictions for next year. In comparison, last year all we heard were questions about the owners and finances.
It may also lead to a more active trade market as we get closer to spring training.
MLB teams have more money now than they ever did.
Let’s not forget that this past November MLB sold BAMTech to Disney for $900MM.
BAMTech provides the streaming platform for organizations such as Worldwide Wrestling Entertainment, Warner Brothers, Discovery and HBO.
They are also cashing in big time on all those gambling platforms.
So, there is no shortage of cash in MLB. But there is a shortage of competitive balance.
What we have seen this free agent marketplace is the willingness for the bigger market clubs to widen the gap with the smaller market clubs.
The smaller market clubs hope to grab one of those expanded playoff spots, get hot, and ride it out for as long as they can.
Is that good for the game?
I don’t think it is.
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