New Signing Limits Put Free Spending Rays in Their Place

Last summer, Major League teams had to operate under the new rules imposed on amateur signings put in place by the CBA last winter. While international free agents had previously signed for whatever the market would grant, MLB imposed a $2.9 million spending cap on each Major League team. As Ben Badler noted over at Baseball America today, however, the Rays exceeded the limit and are going to face some significant penalties for doing so:

The CBA limited every team to a $2.9 million bonus pool for the 2012-13 international signing period that began on July 2. The strongest penalty in the CBA is that any team that exceeds its international bonus pool by 15 percent or more will pay a 100 percent tax on the overage and won’t be able to sign a player for more than $250,000 during the 2013-14 signing period. Since July 2, the Rays already have spent more than $3.7 million (not counting players signed for $50,000 or less, since there are exemptions for those players), which is 28 percent beyond their international pool.

As a result, the Rays won’t be able to sign anyone next year for more than $250,000 and probably won’t make any major international splashes until July 2 either because of the tax. Going well beyond the bonus pool is a curious move, but the Rays did pull in a considerable amount of talent, including arguably the two best 16-year-old pitchers on the market. Given that their 90-win season last year will give them one of the lower bonus pools for the 2013-14 signing period, which many scouts believe is shaping up to be a down year for international talent, perhaps it will be a worthwhile gambit.

The 100% tax means that the Rays will owe the league an extra $800,000, which isn’t a huge penalty, but the inability to sign any player for more than $250,000 next summer is a significant issue, and continues to show why the current international limits simply don’t work to promote competitive balance.

The main issue here is that a team’s future spending allowance is tied to its previous season Major League record. As Badler notes, MLB is going to a sliding scale beginning this summer, with losing teams receiving much larger pools for international free agency than winning teams. The idea is to have this system model the domestic amateur draft, where the bonus pools are tied to overall sections, and teams with the highest picks — due to having losing records during the prior year — getting the largest bonus pools.

This penalty for the Ryas shows why that system sets up some faulty incentives, however. Because win-loss record is used as the baseline for the pool allotments, the low-revenue Rays were classified as a team that needed to have their international spending constrained, theoretically in order to promote competitive balance. Meanwhile, some of the largest bonus pools this summer are going to go to the Red Sox, Mets, and Cubs, each of whom put losing teams on the field last year despite their significant revenue advantages.

The Rays are essentially being punished for their success, while large payroll failures get rewarded with extra opportunities to load up on their farm system because they mismanaged their big league roster for so long. Instead of promoting competitive balance, this system puts a ceiling on how much money a low-revenue team can invest while placing a net underneath large revenue clubs who have squandered their financial advantage.

The idea of sliding scale pools for international spending — and the draft, as well — is a good one. Tying the baseline to the team’s prior year winning percentage is the heart of the problem. If the goal is to reduce the revenue advantages of large market clubs, then the sliding scales should be based on revenue, not on wins and losses. Allow the clubs that can’t keep up with the largest Major League payrolls to have an advantage in prospect development, so that they can offset (to some degree) the payroll disparities that exist at the Major League level. Instead of tying the pool amounts to previous season win-loss record, simply tie them to some kind of proxy for financial advantage. MLB already calculates these kinds of formulas for revenue sharing purposes, so they already have instruments that would allow them to scale the bonus pools based on each team’s financial resources.

That kind of system would actually serve to give the lower revenue clubs an actual advantage in player development. Right now, teams like the Rays are forced to choose between winning and development, and tying the bonus pools to a team’s record forces them to make decisions like the one the Rays made last summer. That’s not in the best interests of competitive balance, and it’s a relatively easy fix. Major League Baseball has done a lot of good things to help smaller market clubs compete; they shouldn’t keep this system in place any longer than they need to.

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Dave is a co-founder of and contributes to the Wall Street Journal.

44 Responses to “New Signing Limits Put Free Spending Rays in Their Place”

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  1. Brian says:

    Isn’t the Rays international pool money trade-able? If so, that pool money is more valuable to another team who can sign players for more than $250k and the Rays could squeeze extra value out of the 2013-14 pool money by trading it. Since they didn’t lose any 2013-14 pool money for their over-slot 2012-13 signings, their strategy would seem to maximize the value obtained from the 2012-13 and 2013-14 international monies (assuming they trade the 2013-14 pool money).

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  2. jdbolick says:

    Tying sliding scales to revenue is a horrible suggestion. The point of the amateur draft is to provide struggling teams with theoretically “better” talent in order to promote competitiveness. I’m fine with the argument that the current system needs improvement, but basing things on revenue would punish teams for being “rich” regardless of whether they do well or poorly on the field. If something needs to be adjusted, then either expand the sliding scales to account for more than one year’s results (maybe average the last three) or give each team the same limit on spending.

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    • Dave Cameron says:

      If a high revenue team does poorly on the field, they don’t need more money for prospect development – they need a new front office. The advantages of having access to a ton of revenues are already so significant that a team that can’t win despite those built in advantages doesn’t deserve to be bailed out. They deserve to lose until they fix the systemic problems causing them to waste their resources in the first place.

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      • Near says:

        This isn’t necessarily true, the new CBA agreements are merely codifying what’s been going on in baseball over the past few years: an emphasis on developing and retaining internal talent.

        Although we have some recent high profile exceptions like Albert Pujols and Josh Hamilton, it feels like the era where any young(-ish) elite player could go onto the open market and get top dollar seems to be fading into history. FOs are more savvy to the risk involved in signing such players, and their value risks being supressed by questions or draft pick penalties.

        Although I agree that teams with high payrolls shouldn’t get any breaks because they play a bad team – having an advantage and squandering it is never something to look favorably on- the role of payroll is changing: rather than buying elite talent, it’s shaping out to be a bigger margin of error for FOs. If a free agent doesn’t work out, a high payroll team has the resources to pursue other options, barring bad PR.

        I feel the Giants and Yankees are good examples of this. For the past two years, analysts from all corners were skeptical of the Yankees pitching, but that pitching brought them to the playoffs (where the hitting, of all things, failed). The Giants had several albatross contracts in Zito, Rowand and Huff, but managed to acquire low cost options to make up for the dead money. Both New York and San Francisco are big markets handcuffed by PR and payroll, but those resources allowed them to reach for major league depth other teams couldn’t.

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      • Travis says:

        If a franchise can’t figure out how to generate revenue with a professional MLB team they deserve to lose until the fix the systemic problems causing them not to generate revenue.

        Fixed that for you. Some of the small revenue teams may genuinely doing the best they can with a smaller market, but I think a good number of them just don’t generate revenue because they are poorly run.

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        • Seanto says:

          Your argument that a small revenue team is one because it is poorly run is ludicrous.

          The Rays are one of, and an argument could be made that they are the, best run team in baseball. Their problems with generating revenue come from a number of factors, not the least of which is the local economy (which was absolutely shredded by the recession and the BP oil spill).

          The Rays, along with the A’s and the Reds, are punished for reasons that have nothing to do with baseball. They would love to earn as much as the Yankees, Rangers, or Phillies, but they can’t and probably never will. Yet, year after year, they find ways to put up comparable if not better ball clubs. Give them credit where credit is due, and stop using baseball bureaucracy as a reason to keep the disadvantaged in the doldrums.

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      • jdbolick says:

        That’s pretty asinine reasoning, which is usually what we get any time someone points out a flaw in your arguments. Once again, the point of talent distribution systems is to promote competitiveness, not to judge a franchise’s job performance. In fact, the system pretty obviously gives advantages to teams that haven’t done a good job and therefore ended up with inferior records on the field. That’s why your comment about how those teams “deserve to lose” is so utterly ridiculous. Whether or not a team is “rich” is completely irrelevant to the question of whether or not giving further advantages to them promotes competitiveness.

        As a simple thought exercise to demonstrate how completely absurd your statement was, Dave, tell me if you would support the amateur draft being changed to a system based on revenue. So instead of having it done by previous season’s record, the #1 pick would always go to the team that brought in the least money while the #30 pick would always go to the team that brought in the most. Pretty ridiculous, right?

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      • philosofool says:

        Honestly, this seems to oversimplify quite a lot. Every team is a substantial amount of risk in FA signings and extensions. Injury is very difficult to predict and can destroy even wealthy teams’ financial advantagse. Just because the Yankees are rich doesn’t mean that they should be treated differently when the a contract blows up in their face. The Nats, Rockies and Reds shouldn’t be given a break when Zimmerman, Tulowitski and Votto all become perenial four hundred PA guys while the Yankees are treated like villians because they happen to have the best market in baseball.

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      • Baltar says:

        You are all correct, Dave.
        The right thing to do is so obvious that it is ridiculous that it hasn’t been done:
        1. Eliminate all restrictions on how teams can use their money and let them decide. No luxury tax; no ceilings on foreign and domestic amateur spending.
        2. Eliminate the draft.
        3. Institute a meaningful progressive revenue tax, both negative and positive. The low-revenue teams deserve a substantial share of the high-revenue teams money as they provide the competition. Major League Baseball wouldn’t have much success if only 6 or 8 teams were playing each other all the time.
        Obviously, this won’t be done. The players want the teams to funnel all of their spending into increasing salaries for existing players, and the rich teams relish their advantage.

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  3. Bryce says:

    I sincerely doubt that the Rays “won’t make any major international splashes until July 2.” Since they’ve already triggered the punishment for next year, they should probably continue to spend with abandon this year.

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  4. Ben says:

    This reinforces the notion that the new CBA is just dismal.

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    • philosofool says:

      This just reinforces the notion that people are far to inclined toward extreme position on the basis of a priori, empirically unfounded reasoning.

      I get saying that the new CBA looks like it is “problematic” or “less well thought out than it might have been” or “likely to be pretty bad.” “Dismal” is just an overstatement give what real data and evidence we have.

      Let’s not forget that baseball didn’t spring this on Tampa Bay; Andrew Friedman, who is smart, made a choice to put himself over the cap.

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      • Ben says:

        Yep, that’s certainly true, and the media environment of our age is only heightening our inability to deal with nuance and ambiguity. But I stand by dismal for several reasons.

        There’s a clear link between the inclusion of Puerto Rico in the draft and a decline of baseball in Puerto Rico. I think the imposition of caps on international signings will have a comparable, but not nearly as dramatic effect on young international players who are strongly motivated by large payouts. I also think there is a similar reason to worry about the effect bonus caps will have on multisport athletes–if you can go to college on a full-ride scholarship (something baseball at the college level does not offer) with the eventual NFL or NBA reward being greater than baseball’s what reason does a college-bound multisport athlete have to focus on baseball?
        I think the basic premise that bonuses must be capped is absurd. The draft represents a minuscule portion of the overall baseball economy, and spending on young players could triple and still be an extreme value proposition.
        It’s also the case that these caps hamstring lower revenue teams. I don’t think there’s much question about that. And the new CBA has very clearly warped the free-agent incentive structure. Part of me doesn’t really mind, in the schadenfreude way, because it was the players’ union that chucked amateurs under the bus, and another part thinks that ultimately it’s the players that should be rewarded, not the owners.

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  5. Greg says:

    The obvious workaround is if you’re going to spend over budget, spend WAY over budget. What’s stopping the Rays from spending $8 million on IFA’s in 2014 and just forfeiting the right to buy a player worth more than $250k in 2015? Sure, you pay a big tax on the overage, but you also save a little bit of money during the 2015 spending period by not going up to the max. The problem isn’t with the CBA if the Rays don’t want to pay a ~5 million tax, the problem is with the fact that the Rays cannot continue to exist in their current stadium/location.

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    • Brian says:

      I believe the Rays start forfeiting draft picks if they spend too much. I’m confident of that, but I will have to read into that further.

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    • Mr. Sanchez says:

      Or blowing the budget in a year when you see several potential big time talents there, and taking the hit in a down year where there’s not a lot of talent you’d want to spend money on anyway.

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  6. Chris says:

    Suppose they find a guy that they like that demands $500k. Couldn’t they just sign him for $250k and also sign his great-grandmother for $250k?

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    • Max says:

      this sounds all good, but I’m sure MLB would start an investigation, which if not stopped would cost the Rays much more than one international player. there are plenty of ways to get what you want through the legal system if you’re a rich organization like MLB, even if what the Rays did wouldn’t technically be illegal.

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    • pft says:

      Might be wrong on this but if the pick refuses the 250 K they simply get a replacement pick for the next year.

      Also, I wonder if teams can get around the bonus restriction by offering larger salaries in a multi-year deal. Same guaranteed money over several years as salary instead of bonus

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    • Brian says:

      Here’s another thought. Does MLB really think they can find a gym bag of under the table cash in a third world country? How hard would it be to sign a guy from Panama, DR or Colombia for $250,000 officially, but $500,000 unofficially?

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      • Seanto says:

        This might seem possible, but smacks in the face the way the Rays brass run their operation. They wouldn’t take the chance for fear of more severe penalties down the line.

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  7. JP says:

    Hahaha. Let’s all pretend that the spending cap on international free agents was intended to improve competitive balance.

    The new rules were clearly about preventing international free agents from selling their services to the top bidder. Come on, these rules are about screwing international prospects so team owners can get their services at a discount. True capitalists, these billionaire team owners.

    The idea of limiting spending for international free agents is an abomination. We’re talking about often very poor kids from the developing world being forced to take less money, all so American billionaires can save some cash.

    As this post argues, the rules don’t even help reduce competitive imbalance. That’s because these rules have nothing to do with competitive imbalance, and everything to do with reducing payments to international prospects.

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    • Steve says:

      While I agree with this point in general, it is worth noting that the new CBA does ALSO screw amateur AMERICAN talent in similar ways with the draft pool/slotting, etc.

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  8. Tom Greybalt says:

    I agree with what JP says, that the rules are much more about avoiding bidding wars for international players.

    That said, I think MLB has a far stronger vested interest in NOT helping low revenue teams. Particularly ones that are successful on the field.

    Low revenue teams are a drain on MLB, their biggest consideration (from the MLB point of view) should be increasing their revenue. I see no upside for MLB to create a system that offers any competitive advantage in any field based on low revenue.

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  9. Hank says:

    SO I guess folks who want the IFA budget scaling to be based on revenue, also think the amateur draft order should be changed to be based on revenue as well (as opposed to last year’s record).

    That too would help competitive balance. no?

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    • kamikaze80 says:

      that’s a good idea, why not?

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      • philosofool says:

        Because Loria has been scamming shit like this for years.

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      • jdbolick says:

        The anti-rich crusade has really gotten out of control when it’s found its way to Fangraphs.

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        • Dor Fong Olf says:

          There’s no anti-rich crusade, that’s plain silly.
          However, I don’t think the Dodgers should be rewarded with the ability to spend more money than other teams internationally if and when they have losing seasons on a $200M+ payroll.
          Isn’t that sort of the opposite of competitive balance?

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  10. Antonio bananas says:

    Watched the documentary “Poletaro” last night in which Miguel sano’s agent says “the bonuses these guys are getting keeps going up, eventually Major League Baseball is going to do something to curb it” aaaaaaand then I read this. Spooky.

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  11. Antonio bananas says:

    Why not just have an international draft set up almost exactly like the first year draft?

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  12. Eddie says:

    The goal is not to reduce the revenue advantages of large market clubs. The goal is to promote parity, and to cut spending. Viewed through that lens, the new amateur spending limits are perfectly rational.

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  13. pft says:

    The tax is chump change.

    Not being able to spend more than 250K for draft picks simply means they will have some unsigned picks in 2013. In this case I believe they get a replacement pick for 2014.

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  14. Who? says:

    “Meanwhile, some of the largest bonus pools this summer are going to go to the Red Sox, Mets, and Cubs, each of whom put losing teams on the field last year despite their significant revenue advantages.”

    The Mets certainly don’t belong in this group. Their value dropped last year and they had $41M in operating losses. Not to mention the Wilponzis have been hemorrhaging money and using revenue from the team to pay for their other losses.

    “If a high revenue team does poorly on the field, they don’t need more money for prospect development – they need a new front office.”

    Or in the Mets’ case they need new ownership. Their front office is just fine. Yet Selig continue to let those crooks continue to run the team to the ground.

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  15. Simon says:

    Very confused commenting here. This doesn’t impact on draft picks at all, or on how much the Rays can spend on the draft.

    I think that it’s likely that the Rays have decided that the best strategy for a relatively successful team is to totally ignore the cap in one year, sign lots of good expensive guys, and pay tax. It wouldn’t shock me if, given the distortions that the CBA imposes on the market, it was still cost-effective to sign players while paying 100% tax. In the next year, you go cheap, stick within your limited pool and don’t worry too much about not signing big ticket guys, as there’s only so many you could get within your $1.5 million or so. Then you’re free to bust the cap again the year after. This seems to me to be a better strategy than to conform to the rules every year when you have a smallish pool due to your MLB success.

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  16. Patrick says:

    The obvious question is whether baseball wants competitive balance or fairness. If the latter, then limits ought to be assigned based upon market size rather than revenue. The Yankees and Mets share the same market; the Mets shouldn’t be rewarded for being badly run. Similarly teams like the Cardinals and the Red Sox, whose revenues exceed what one would expect given their markets, shouldn’t be punished for being well run and making investments in their teams.

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  17. Pirates Hurdles says:

    Complete revenue sharing of all TV money and a hard cap solves all of these issues, but why would you want to run your game like the NFL, its not like that has been hugely successful…

    With that in place the slotted draft system (worldwide like NHL) works fairly well in that you are no longer interfering with the only methods of cheap talent acquisition for formerly low revenue teams. The best young talent goes to the worst teams and all teams can keep there star players as long as they like.

    Only in that format do you level the playing field and reward the best front offices for talent evaluation and savvy.

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  18. TKDC says:

    I fail to see how this doesn’t help competitive balance. The Rays are better than the teams you mentioned. The rules help those teams. I guess it depends on whether you define competitive balance as parity or fairness. If the goal is parity* then it does a good job.

    *I also agree with the previous comment that this really is about suppressing IFA contract sizes.

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    • vivaelpujols says:

      seriously. This is Dave making a value judgement about which types of teams deserve to win. Fantastic.

      I do find it weird that MLB caps draft and international signings now, but not free agents. Well I don’t find it weird at all because it helps the owners and the MLBPA…

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