New CBA Offers Mixed Bag For Competitive Balance: part 2

It’s too early to say much with certainty about how the reforms to the MLB draft will play out – as concerns competitive balance – but what I can see I don’t like. For quite some time now canny small-to-medium-market teams have figured out that the draft (and, to some extent, international player development) is a place where they can get a great deal of benefit for a limited investment. That’s going to change. For years the commissioners office has been issuing draft slot guidelines and grumbling when teams spent more, with the new CBA these slotting recommendations have teeth – teeth like a sabertooth tiger. Teams that spend up to 5% over slot (on the draft as a whole, if I am not mistaken, as opposed to on a single pick) get a monetary punishment equal to 75% of the signing bonus amount. Not too ugly? If you go over by 5-15% you lose your next first-rounder. If you go over by more than 15%? You lose your next two. Draconian.

The point of all this, I’m sure, is to make the draft (and signing draft picks) simple. The team rep tells the player’s agent that they can’t afford to deviate from slot, take it or leave it. The player takes it or leaves it. Simple, right? In many cases, it will be exacly tha – when the player has gone exactly where he and everyone else think he deserved to go in the draft. What if a guy slips based on signability concerns? It certainly happens a lot now – when a guy who is #10 material slips to #30 because #10 slot money isn’t enough to pry him away from that college commitment. Will it happen any less with a harder slot? I doubt it, but what we’ll see is that taking a chance on that guy farther down gets more and more dangerous. Can you justify taking Nick Castellanos in the second round if you know it would take $3.45 million to sign him? Second round slot money is peanuts, so with that one deal you probably sacrifice two first-rounders. If Castellanos falls too far, he’ll just have to wait for the next draft. In theory, this makes it difficult to put your money to work for you (really, it makes it difficult to have any relevant draft strategy other than old-fashioned scouting) so it should benefit those teams that don’t have any money to work with. Small-market teams that are well run and competitive have been putting a lot of money into the draft and player development, this isn’t solely the refuge of the mighty Yankees. The small-market whiners (I’m thinking about Pittsburgh, but feel free to associate the tag with whoever you like) who have drafted to win will certainly benefit, as they would when any other competitive facet of the game became purely mechanical. Small-market teams seeking an edge will lose, as will their larger-market brethren. In a sense, this is a definite plus for the ‘competitive balance’ of the game – as would simply assigning high-schoolers to teams randomly and flipping a coin to see if they sign – but I don’t think it’s going to do good things for the game.

One thing is for sure: losing your first-round pick gets a lot worse if you cannot overpay a sandwich pick who fell too far without further retribution (which has been a strategy for Detroit and others). That makes the punishment for exceeding slot even harsher than it might seem at the moment, and will likely have a significant impact on free agent decisions involving Type-As this offseason and beyond.

Last on the list is the limits on international signing bonuses. This is, in a sense, necessary given the limits on signing bonuses to draft picks and would involve penalties for exceeding limits similar to those in the draft. The problem is that, even to the extent that we want it to work (which would mean that the competitively disadvantaged teams weren’t able to take advantage of the international talent market) I don’t think that it will. One issue is the well-intentioned idea that teams with lower winning percentages should have higher spending limits than do teams with higher winning percentages. In effect, the draft limits do the same thing, since teams with lower winning percentages tend to have higher picks and therefore higher slot recommendations. This introduces some problems, though: first, disadvantaged teams that managed to have some success are hurt. Second, since teams’ ability to spend will fluctuate dramatically and unexpectedly from year they need to be prepared to strike when they can and not when they really want to. So… in order to take advantage of, say, the Dominican market a team will need to have enough of an operation on the ground that they can always find $5 million worth of players to throw bonuses at (without simply wasting it) even if they probably won’t be able to spend more than $2 million. Since a the punishments for a team that exceeds it’s limit can’t take away ‘picks’ (there are none) what they will do is prevent a team from spending more than X-amount on any specific player in the future, further increasing the benefits of having a better scouting and player development organization on the ground – since teams that have been punished will have to make up for quality with quantity or by discovering more diamonds in the rough. Since teams are only limited in spending on bonuses and not on their scouting operation itself, this allows teams that want to invest a significant chunk in Latin America to continue to do so. Limits will also not apply to Japanese and Cuban major-league-age players, who will remain effectively the same as any other free agent in the eyes of the league.

There are a couple of reasons why certain franchises (particularly the most moribund) have chosen not to focus on Latin American player development. As I mentioned above: the operation itself is expensive, a parallel scouting organization and what amounts to a parallel farm system with already-signed prospects in latin leagues and prospects-in-waiting in academies. Another reason is that latin american signings are risky: players tend to sign at age 16, making them even farther from the majors than a draft pick signed out of high school. It won’t necessarily work in the interests of competitive balance if moribund teams have the authority to spend $5 million on Dominican players (while the Yankees aren’t even allowed to spend $2 million) if they either don’t want to spend it (since they don’t have the money or wouldn’t risk it) or have no idea who to spend it on. Within a couple of years these teams will be allowed to trade money from their international budget, which may solve this part of the ‘problem’ for competitive balance that a team failing to attempt to compete presents. Teams that will benefit are teams with established organizations, and perhaps deeper pockets, who find themselves ‘temporarily’ located near the bottom of the W-L spectrum.

The scale of the cap presents a curious problem as well. The cap will be $2.9 million for each team in 2012-2013, and will then vary based on winning percentage from 2013-1014 on (between $1.8 million and $5 million). For 2011-12 offseason no changes will take place, since many players have already been signed. Good thing too – the Rangers alone signed two Dominican 16-year-olds (Ronald Guzman and Nomar Mazara) for $3.5 million and over $5 million respectively. Now since the cap would be $2.9 million, the Rangers would have already gone over limit by almost 200% with those two signings (subjecting themselves to draconian punishments). But that’s not the strange thing… the strange thing is that just signing ONE of those two would have put the Rangers over their limit by more than the 15% that gets a team the worst repercussions. Hmm.

The goal of this, and the draft reforms, are likely NOT to balance things but to arrest the rapid growth in signing bonuses that stands to eat into the pure profit of the league as a whole. With draft slotting this sort of limit will sort of ‘work’ since the inability to pay more gives the drafting team leverage – given that no one else can sign the player at any price. With international players, it wouldn’t – since we would continue to have a sort of auction for the top international prospects every July 2. The difference will be that – specifically next July 2 – no one will be able to pay what the previous year’s top prospects got. What we’ll see is, rather than a nice orderly drop in signing bonuses, something more like the NBA’s individual cap where a large-ish number of prospects all sign for a little under $3 million, eating up the team’s entire international budget. Once spending limits diverge, we’ll see the top end return – as only teams able to spend $5 million (either because they lost a lot of games or because they traded for more international budget space) will be able to sign the $5 million guy and the price can get further inflated as long as budget space comes cheap on the trade market.

In conclusion: I don’t see much here that would help level the playing field in baseball. What I do see is some changes that would hurt the competitive small-to-medium-market teams we’ve seen over the past decade for the benefit of the league’s bottom line and a handful of genuinely moribund franchises [not all of which are located in small markets] that have not been taking advantage of every opportunity to get a competitive edge within the system as is. I also see some things that will entrench and reinforce what I consider to be the worst aspects of the revenue disparity we think of as ‘competitive imbalance’. For more than a decade, small-market teams have tried to succeed by being effectively farm teams for the big boys – and if they did things just right, winning games along the way. Hidebound conventional wisdom seems to be that as long as teams like Tampa Bay, Milwaukee, etc… can do this then the system is OK. If that’s what you believe, then one big threat to competitive balance (as well as a threat to league-wide profits) has been the rapidly rising cost of signing amateur talent and a lot of effort in crafting this CBA has been intended to stop that growth in its tracks. It might do just that.

I, unfortunately, don’t feel that this is what is wrong with the revenue disparity in baseball. The problem is the inability (or unwillingness) of small-market teams to hold onto veteran fan-favorites or to maintain a product or consistent on-field quality as opposed to a boom-bust cycle. At it’s ‘best’ teams it has been possible for teams in this situation to hold onto players for 5 1/2 years before flipping them for major league ready prospects or young players who would continue to play for them for another 5 years. This model – which is far from ideal – has been increasingly threatened of late not by signing bonuses but by rising arbitration salaries. That trend is going to continue apace with nothing which directly addresses it and the increase in super-twos. In addition, we get a greatly reduced value for a midseason rental with the loss of compensation. Altogether, that leads to a continuing trend towards salary dump trades of talented players by out-of-contention smaller market clubs with more than a year remaining on their free agent clock. We’re also going to see the complete and total collapse of the strategy successfully pursued by certain competitive small-market clubs: starve the big league roster, invest the savings in signing and developing a critical mass of prospects, reallocate money from the minors to the majors if and when the strategy pays dividends. That’s bad. A team that can’t fill holes with free agents, or trade chips from a very deep farm system, has to do what the Pirates have been doing: acquire amateur talent of middling cost and potential year after year, drip feed it into the majors, watch some flower and some flop, trade away the ones who flower for more prospects to get a slightly broader group for the next cycle, never break .500 without extraordinary luck.

Of course, I’m being unfair to the Pirates here… the Pirates had been a ‘moribund franchise’ for as long as I can remember but have in fact belatedly come around to the “successful strategy” as well. Last year they spent $17 million on the draft, a sum that will get them censured by the league in years to come. Perhaps they can now take comfort in the knowledge that they don’t need to do that to compete (or, I would think, don’t need to compete)?