The Contractual Reasons Why Free Agent Contracts Are Down This Off-Season

I had read earlier this off-season that the owners had pantsed the players’ union in the latest collective bargaining agreement (CBA) on terms affecting free agency, but I didn’t actually look at the CBA to see for myself until two days ago.  There are certainly reasons to think that the new contract terms have an awful lot to do with this off-season’s disappointing free agent signing period, at least as far as the free agents and their agents are concerned.

The current CBA punishes free agents in a less direct way than the old free agent compensation system, but by separating the compensation paid from the actual free agent signed, it may be boosting owners’ resolve in refusing to sign sign free agents, at least if it means going over the salary cap to do so.

The new rules much more steeply punish teams for going over the team luxury tax thresholds (i.e., a soft salary cap).  Under the system that started with the 2017 season, penalties are much steeper if a team goes over the luxury tax, particularly if they are over the base luxury tax amount ($197 million in 2018) three years in a row.  Plus, the penalties increase by the amount over the luxury tax threshold, up to a 95% on the payroll amount over $237 million (the third luxury tax threshold) in 2018 if  the team has been over the $197M base luxury tax threshold for the third year in row.

Meanwhile, each time a team gets itself under the luxury tax threshold in a year, it resets the taxes at the lowest rates the next time the team goes over any of the three luxury tax thresholds.  Plus, starting with the current season, any team going over the third luxury tax threshold ($237M in 2018) (it’s called the Second Surcharge threshold in the CBA for confusion’s sake) has its top pick in the next Rule 4 amateur draft automatically dropped ten places.  Everyone reading this should know that a team’s first pick in any draft is far more likely to result in a major league regular player than any subsequent draft pick that year.

In sum, the new penalties are steep this offf-season if a team goes over the $237M amount or goes over the $197M amount for the third season in a row.  At the same time, the wealthiest teams can reset the monetary penalties every third season by dipping under the currently $197M amount.

These are powerful incentives for the wealthiest teams (the teams which drive free agent contract amounts as a whole) to keep their annual payrolls within range of the currently $197M base threshold amount so that they can dip below it at least every third season.  It’s also an incentive for the wealthiest teams to shorten free agent contract lengths to three seasons or less, so that they will have the flexibility to try to dip below the first luxury tax threshold (base threshold amount) every third season.

I think the owners also accurately predicted that separating penalties from the actual free agents signed would make teams less likely to spend than under the old system.  Under the old system, a team signing a free agent who received a qualifying offer lost its first round draft pick, so long as the pick was not in the top 10 or 15 overall.  Thus, a team could directly compare the value in the immediately following seasons of the free agent they hoped to sign with the value of the first draft pick they would lose by the signing.

Now the incentive is to keep overall team salaries below the soft but increasingly stern salary caps.  Now teams no longer lose that first round pick by signing any particular free agent, but are instead punished if they go over the third luxury tax threshold.  Because the penalty is now more divorced from any particular player the team hopes to sign, I suspect the psychological effect has made teams more unlikely to sign free agents that will put them over the salary caps.

I had wondered why teams had been willing to negotiate away first round draft pick compensation for signing elite free agents, which looked like a huge win for the players’ union.  Now I understand it — the owners with their tougher salary cap penalties have apparently gotten back even more than they gave up.

However, I also suspect that the typically high-spending Yankees and Dodgers are trying to get under the $197M base threshold this off-season because they want to spend big next off-season.  The Dodgers want flexibility to re-sign Clayton Kershaw, this generation’s Sandy Koufax, if he has a 2018 season in line with his career averages and opts out of his current contract; and the Yankees want flexibility to throw money at Manny Machado next off-season.

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Explore posts in the same categories: Baltimore Orioles, Los Angeles Dodgers, New York Yankees

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