How the new MLB CBA impacts small-market teams like the Indians: WFNY FAQs

Jason Kipnis Cleveland Indians Walk-off
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The MLB and MLBPA managed to come to an agreement on a new five-year CBA, which means baseball will not have a labor interruption until 2021 at the earliest. News continues to trickle about the agreements and changes made such as the “best” record determining home field advantage for the World Series,1 but the biggest items seem to enable small-market baseball teams to compete.

MLB was said to have grown worried of the long-term damage that might be inflicted by the absolute dominance of large-market ballclubs on the competitive landscape. While the Indians did manage to push Game 7 of the World Series into extra innings before finally succumbing to the Chicago Cubs, they were the only team in the bottom half of payroll (and revenue) to be among the 10 postseason teams.

Recent years have seen the Boston Red Sox, San Francisco Giants, and Los Angeles Dodgers (among others) widen the revenue gap, which has allowed them to also widen their contention windows. Without an ace up the sleeve such as a player development system that churns out high quality pitchers at a rate unseen across the MLB landscape (thank you Indians Director of Player Development, Carter Hawkins), the lower revenue teams are left hoping to sneak into the postseason and perhaps ride a wave to a championship Because Baseball. The hope was that MLB would recognize the discrepancy and proactively looked to correct the problem before it became any worse.2

Maury Brown of Forbes has been accumulating the details of the new CBA.3 A significant change is a bit of a complication to the entire ordeal. MLB ballclubs were broken up into three distinct classes. Luxury tax payer teams (crazy big markets), teams that cannot receive revenue sharing (big markets), and teams that can receive revenue sharing (small markets). Here are the changes Indians fans should care about the most.

International Signings Hard Cap

The Dominican MLBPA members came out in force against having an international draft, but MLB achieved their goals without one. The entire idea behind the draft was to limit teams like the Los Angeles Dodgers and Boston Red Sox from manipulating the system to their benefit.

The rules (now the old rules) of a soft cap allowed teams to pay a penalty of ignoring their cap if they were willing to accept being unable to sign a player over the minimum the next year. As an unintended consequence, a few teams with the biggest budgets spent far more money than their cap space every other year with the idea they could supplement their system with the most elite prospects in that manner.

Big Savings for Big Fans at Fanatics.comWorse, some teams cheated the system. Latin American prospects have a trainer who acts as their agent as well. So, certain MLB clubs – the Boston Red Sox were caught – would sign players in the year they were ignoring the soft cap far more money than a player was worth. The trainer would withhold some of that money. The next year, when the team was supposed to only be able to sign minimum contracts, that trainer would accept a minimum contract but give the held over monies to this new player.

The new hard cap eliminates such practices. Teams may not go over their cap number though they are allowed to acquire up to 70 percent additional cap room through trade.4

The actual number of the cap for each team is dependent upon which MLB club class a team belongs to and if they have lost Qualifying Offer (QO) players the year prior. The range though is between $4.75 and $5.75 million, which is far less than overall money than had been spent on these players in the past.5 The overall balance on cash range here is absolutely huge in allowing smaller market teams to compete for international talent.

Qualifying Offer remains

Another surprise of the new CBA is that the Qualifying Offer was not killed off though one big change is a player may only receive a QO once. The penalties a team receives for signing a QO player are not as high, but they are still significant.

Here is what each class loses for signing a QO player:

  • Crazy big markets forfeit second-highest and fifth-highest selections, and they have their international hard cap reduced by $1,000,000.
  • Big markets forfeit their second-highest selection, and they have their international hard cap reduced by $500,000.
  • Small markets forfeit their third-highest selection.

Here is what each class receives for losing a QO player to another team:

  • Crazy big markets receive a sandwich pick after Round 4.
  • Big markets receive a sandwich pick after Round 2 (but also after the already allocated sandwich picks).
  • Small markets receive a sandwich pick after Round 1 if the total guarantee on the contract is greater than $50 million, otherwise they receive the same as the big markets.

The QO remaining is a gigantic victory to small-market teams for three reasons. Free agency contract values for these players will be lower in money due to the necessary payment in draft assets as players have griped about it over the past several offseasons.6 Teams whose QO players sign contracts elsewhere will still receive compensation in the form of draft picks to help restock their talent pool. Also, small market teams pay less for extending the QO and receive more for losing one. A huge win here.

Luxury Tax Penalty Rises

The most obvious change to the CBA that helps small market teams is the greatly increased penalties for going into the luxury tax domain of the payroll with only a slightly increasing threshold for the luxury tax line.

First-time luxury tax payers will be hit with a 20% tax, second-time 30%, and third (or more) 50%. But, that is just the beginning of the tax system now. There is also an incredible surcharge designed to penalize the teams like the Dodgers who just blow past the luxury tax line.

  • $20-$40M above line: 12% surcharge
  • Over $40M above line: 42.5%-45% surcharge plus their highest selection in the Rule 4 Draft is moved down 10 places.

Between the lump sum fine and the percentage fine, teams such as the Dodgers with $300 million payrolls will need to reassess if they are able to continue to do so knowing the repeater tax might have them paying double that amount one the tax is assessed.

Not only can such penalties help curb high payroll spending, but it also will help highlight exactly how much the revenue gap truly is between the clubs as these decisions get made (say the Dodgers keep spending $300M anyway), which can be used at the next round of negotiations in 2021.7

Revenue Sharing slightly reduced

It is important to note that luxury taxes do not get allocated back into the player pool. Small-market clubs do not receive this money as MLB uses it elsewhere. Revenue sharing is the financial aid that the lower revenue teams receive.

Initially, the reports noted no changes to the revenue sharing in this CBA, but new reports are stating that the multiplier effect for the highest revenue clubs is gone, which will reduce the portion shared. Instead of the model moving towards a more equitable share of the financial pie, it is significant that there were increases in luxury tax (not going to small-market teams) but that revenue sharing was reduced, albeit slightly if these reports are accurate.

Last Word

The year 2021 is a long ways out, so it is impossible to know what will happen. Many are predicting a much more difficult negotiation with a lockout or strike quite possible. For now, there will be baseball. Early analysis is pointing to the players giving up much larger concessions but do not let it escape you that so did the largest market teams.

The biggest winners this round are teams like the Cleveland Indians. There may not be a salary cap like other leagues, but these changes should be making all Tribe fans smile.

  1. Stating best record when leagues barely play each other and schedules are fantastically unbalanced due to division means that there is still a large arbitrary factor in the determination. []
  2. Please note that parity has reigned in actual World Series champions in this century better than any other American professional sport. The issue lies in that the big markets are getting the most chances in the way of playoff berths. Over time, the age of parity could be snuffed out. []
  3. He has a ton more detail that will not be outlined here. If you are interested, then please visit his page. []
  4. Yes, the agreement of a hard cap was a loss for MLBPA and the international players, but it also hurts the big budget MLB teams. []
  5. And that is adding up MLB team cash available to spend, not actual cash spent. []
  6. in some cases even leading to preemptive multi-year deals with their current ballclub []
  7. The books of each club are private, so any half-measures to get a glimpse of actual revenues help add to the picture. []