With the 2017/2018 MLB off-season now in full swing, we breakdown everything you need to know as you follow your favourite team.
So the World Series has been played and won, marking the end of the 2017 MLB season and crowning the Houston Astros as the the 113th World Series Champions. However, the MLB grind is relentless and just a week removed from one of the most exciting World Series ever played, we find ourselves in the heart of the off-season. The 2017/18 MLB off-season was sounded in with a bang, when the Los Angeles Angels of Anaheim announced that they had signed all-star outfielder Justin Upton, to a 5 year, $106 million contract extension and removing one of the biggest names from this years free agent market.
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However, this off-season will be markedly different to any that we have witnessed over the last 5 years, as a new Collective Bargaining Agreement (CBA) negotiated late last year brings with it the new rules of engagement for all off-season transactions. So before the hot stove reaches boiling point, allow us to take a look at some of the new rules that will dominate the direction of this off-season.
What is the CBA?
The CBA is a legally binding contract negotiated between Major League Baseball, the Major League Baseball Players Association and team owners that outlines the rules by which the league will be governed. This current CBA will run from 2017-2021 the conclusion of which will mark 27 consecutive years of labor peace between MLB and the MLBPA. The 2017-2021 CBA outlines a number of key changes, including changes to the All-Star Game, regular season schedule as well off-season measures such as the Luxury Tax and the Qualifying Offer. These latter two changes will bring about a large change in the behaviours of both teams and players over the coming off-season, so with that, let’s take a look at how they will work going forward.
The Luxury Tax
Major League Baseball has a long history of avoiding imposing hard salary caps on its teams. As something of a compromise, the 2012-2016 CBA implemented a soft cap, known as the Luxury Tax to try to curb spending by big market teams and achieve greater competitive balance throughout the league. The 2017-2021 CBA brings with it a number of reforms to the Luxury Tax system, which I will walk us through now.
The Luxury Tax can be considered as a penalty for exceeding an agreed upon total payroll. This agreed upon limit, termed the Luxury Tax Threshold (LTT), increases each year to allow for market inflation. The Luxury Tax Thresholds for the duration of the current CBA are as follows:
Seems simple enough. So if we know the Luxury Tax Thresholds for the duration of the current CBA, what are the associated penalties? Well, this is where it gets a little bit more complicated. There are two avenues through which teams are penalised for exceeding these agreed upon thresholds. The first of these is financial sanctions and the second is the loss of future draft picks. If we go into a little more detail it looks something like this:
For first time offenders, teams will have to pay a 20% tax on every dollar over the $195 million Luxury Tax Threshold. For example, a team who did not exceed the LTT in 2016 but whose payroll comes in at $205 million in 2018 will have to pay a 20% tax on the $10 million that exceeded the $195 million LTT. As a result, the team will have to pay $2 million in penalties to MLB.
This penalty increases the more consecutive years a team is in breach of these thresholds. For 2nd time offenders, a 30% tax will be incurred for every dollar over the LTT, while this figure jumps to 50% for teams in breach of the threshold for 3 or more consecutive years.
However, this is just one way in which teams are penalised for exceeding the LTT. There is a second tax that will be implemented this off-season which we can call the ‘superfluous spenders tax’. This penalty, further taxes teams who drastically exceed the LTT in any given year. This tax has few moving parts and is best explained with the aid of a table.
|Overage||1st Time Offender||2nd Time Offender||3rd Time+ Offender|
So if a team were to exceed the luxury tax in 2017 by $20 million ($215 million payroll) then not only would they pay the 20% first offenders tax ($4 million), they would also be subject to a further 12% tax on their overage ($2.4 million) bringing their total penalty to $6.4 million dollars.
If these financial sanctions aren’t harsh enough for you then the 2017-2021 CBA will also penalise teams who exceed the LTT in the July Rule 4 Draft. For any team outside of the first 6 picks in the draft, exceeding the LTT by $40 million or more will lead to having their highest overall draft pick moved down 10 places. For the teams with the top 6 picks in the draft, their second highest overall draft pick will be lowered 10 places.
To make sense of all this then, let us work through the most severe penalty for a team who exceeds the luxury tax threshold. In this example, a team is $40 million over the LTT for a third straight year in 2017 ($235 million payroll). As a result, this team will be subject to a 50% tax on every dollar by which they have exceeded the LTT ($20 Million) as well as a 45% tax as a 3rd time ‘superfluous spender’ ($18 million) bringing their total financial sanctions to $38 million. If we say that they were due to pick 10th in the Rule 4 Draft, they would then have their first pick moved down to the 20th pick in the draft.
The Luxury Tax is one measure outlined in the 2017-2021 CBA, that seeks to promote competitive balance by penalising baseball’s biggest spenders, though it is far from the only one. Aside from the luxury tax, the initiative with perhaps the greatest impact on the free agent market is the Qualifying Offer which, itself, has seen some major reform this year.
The Qualifying Offer
The Qualifying Offer is a one year contract that teams may offer any of its players eligible for free agency, at a pre-determined value. There are two exceptions which may render a player ineligible to receive a Qualifying Offer:
a) The player has received a Qualifying Offer previously or;
b) The player was acquired by the team during the regular season.
The Qualifying Offer is a one year contract valued at the average of the highest 125 salaries in baseball which this off-season, is $17.4 million. Teams have 5 days after the conclusion of the World Series to make a qualifying offer to a player, from which the player has 10 days to either accept or reject it. The rejection of a qualifying offer has a number of significant effects for both the losing team (the team whose player then becomes a free agent) and the signing team (the team who signs that same player). Firstly, when a player rejects the Qualifying Offer, he then becomes a free agent and is eligible to a sign a contract with any of the 30 teams. From there it gets a little more complicated so we’ll work through it as simply as possible. Let’s begin by looking at this scenario from the perspective of the losing team.
When a team who offers one of their players a qualifying offer, loses that player to free agency (and that player signs with another team), the losing team is eligible for compensation. While in previous years this compensation came in the form of a first round draft pick, the 2017-2021 CBA has revised this.
When discussing the qualifying offer there are 3 type of teams:
- Teams who receive Revenue Sharing,
- Teams who do not receive revenue sharing and did not exceed the Luxury Tax Threshold and;
- Teams who do not receive revenue sharing and did exceed the Luxury Tax Threshold
For clarity, a team who receives revenue sharing is one of the 16 teams in the smallest markets who receive a sum of money from MLB to help offset the difference in buying power between the smallest and largest teams.
Let’s again set this up as a table to best understand the way a losing team may be compensated for losing a player it offered a Qualifying Offer.
|Rev. Share||Sandwich Rd Draft Pick if >$50m
Competitive Balance Rd B Draft Pick if <$50m
|Appx. Pick 30-40
Appx. Pick 75-80
|No Rev. Share, did not exceed LTT||Competitive Balance Rd B Draft Pick||Appx. Pick 75-80|
|No Rev Share, exceeded LTT||Draft Pick after Rd 4||Appx. Mid 100s|
Hopefully, this table neatly explains the compensation each team receives for losing a free agent it extended a Qualifying Offer to. When a team loses such a player, it is compensated by means of an extra draft pick at a designated point in the draft. Perhaps the only point of confusion here however, lies with the teams who do receive revenue sharing. If they lose a Qualifying Offer player and that player signs a contract with another team worth more than $50m dollars, the losing team receives a draft pick in the ‘Sandwich Round’ – a set of draft picks between the end of the first round and the start of Competitive Balance Round A. If the players signs a contract worth less than $5o million then the team receives a draft pick in Competitive Balance Round B.
So while teams who lose a player they offered a qualifying offer to are compensated, the team who ultimately signs such a player is penalised. Let’s again work through this, with teams broken up the same way as before.
- Teams who receive revenue sharing will lose their third highest draft pick if they sign a player who rejected a Qualifying Offer. If they happen to sign a second such player, they will also lose their 4th highest draft pick.
- For teams who do not receive revenue sharing and also did not exceed the LTT, they will lose their 2nd highest pick and $500, 000 of international signing pool money. If they sign a second such player they will also lose their 3rd highest pick.
- For teams who do not receive revenue sharing and did exceed the LTT, they will lose both their 2nd AND 5th highest draft pick, as well as $1 million in international pool money. If they sign a second such player the team will also lose their 3rd and 6th highest picks.
To conclude on the Qualifying offer, let’s create a master table that outlines both the potential compensation and penalty for each team type:
|Team||Compensation (For Loosing Plyr)||Penalty (For Signing Plyr)|
|Rev. Share||Sandwich Rd Draft Pick if >$50m
Competitive Balance Rd B Draft Pick if <$50m
|3rd Highest Draft Pick|
|No Rev. Share, did not exceed LTT||Competitive Balance Rd B Draft Pick||2nd Highest Draft Pick + $500k intnl money|
|No Rev Share, exceeded LTT||Draft Pick after Rd 4||2nd AND 5th Highest Draft Picks + $1M international money|
If a player who was extended who rejected a Qualifying Offer signs with that same team there are no penalties or compensation.
However, after digesting all that information you’re probably wondering which players are subject to these crazy rules. Well, don’t worry, as a gift for making it this far I have collected all the players who have been offered a qualifying offer this off-season. We do not yet know however, whether these offers have been accepted or rejected.
Let the Hot Stove Begin
So if you have managed to make it this far, congratulations! You are now an expert on the MLB free agent market. Make sure when you’re thinking about the moves you hope your favourite team will make this winter that you consider the implications of these rules. If your team makes a whole bunch of decisions that you don’t understand then maybe they were conscious of the Luxury Tax and the Qualifying Offer systems. If you still can’t make sense of their decisions then you probably support the Marlins in which case 216Stitches sends our sincerest apologies.
If you are still unclear on any of these rules, or you have any questions about the MLB off-season, please leave a comment below and I will be sure to answer them!!
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