MLB Draft and International Free Agency Reformation

The entire concept of a draft needs to be seen for what it actually is: a cartel by the owners of 30 organizations to restrict the income of incoming players. Admittance into this guild is restricted by the league office, meaning the typical market mechanism for raising these players' bonuses to their marginal value product – entrepreneurs see an opportunity for profits as the price for labor is lower than the expected return which results in a bidding up of the price for that resource – is absent. That same impetus to exploit the arbitrage would manifest itself among these 30 organizations if they were all bidding on the same players – as is the case on the, current, international market and during free agency; the one way MLB has found to counter this is to force all draftees to negotiate with only one employer. No matter what rhetoric is spewed extolling the desire to keep baseball competitive, this is the essence of a draft.

The system that has been in place since 2007 was far from perfect. The confluence of a deadline and a commissioner hell-bent on trying to enforce unenforceable slot figures lead to few agreements prior to that date in mid-August. However hampered it may have been some room to operate was still accessible. A draftee could not receive his market rate, but teams still had to buy him away from his college commitment and the potential to re-enter a year hence and receive a larger figure. It presented a tremendous opportunity for any team willing to spend on the draft, and some of the biggest exploiters were teams that no one dare label as large market.

With every new collective bargaining agreement, the noose becomes a little tighter. The Players Union does not represent these draftees and instead parlay the owners’ desire to restrict their income into benefits for the players that they do represent. Free agent compensation depressed the salaries of veteran players, and in it was feared that in exchange hard slotting – perhaps even an international draft – would result. Both of those calamities were avoided, but what has been agreed upon cannot be considered much better:

1. The draft will continue to be conducted in June, but the signing deadline will be moved to a date between July 12 and July 18 depending on the date of the All-Star Game.

• This is one of the few decisions I can without qualifications endorse. The August deadline that was supposedly going to give teams an upper hand in negotiations merely worked as a date for agents and teams to reconvene for the real negotiation. Players will enter their organization a month earlier and see some playing time during their draft year.
  

2. Drafted players may only sign Minor League contracts.

• With the addition of soft slotting, Major League contracts turned into a creative way in which teams could both pay their premier talent and avoid the wrath that would ensue from the league for giving the player the money in a lump sum. The player gains some financial assuredness, and the team was forced to put the draftee on a more aggressive promotion path. MLB deals would have been much more infrequent if there were no bonus suggestions in the first place.

3. Signing Bonus Pools

A. Each Club will be assigned an aggregate Signing Bonus Pool prior to each draft. For the purpose of calculating the Signing Bonus Pools, each pick in the first 10 rounds of the draft has been assigned a value. (These values will grow each year with the rate of growth of industry revenue.) A Club’s Signing Bonus Pool equals the sum of the values of that Club’s selections in the first 10 rounds of the draft. Players selected after the 10th round do not count against a Club’s Signing Bonus Pool if they receive bonuses up to $100,000. Any amounts paid in excess of $100,000 will count against the Pool.

B. Clubs that exceed their Signing Bonus Pools will be subject to penalties as follows:

Excess of Pool Penalty (Tax on Overage/Draft Picks)
• 0-5% 75% tax on overage
• 5-10% 75% tax on overage and loss of 1st round pick
• 10-15% 100% tax on overage and loss of 1st and 2nd round picks
• 15%+ 100% tax on overage and loss of 1st round picks in next two drafts

• Here is the knockout punch. As I mentioned in the introductory portion of this article, a team reaches an agreement with a draftee by offering him enough money to buy out his college commitment. The fact that the player had little leverage in these negotiations means that bonus figure is likely already close to the lower bound of his preference scale. As a quick aside, it is important to note that a player's statement on how much it will cost for him to forgo college does not constitute his true value scale, it is defined only by action – $5M ranked higher on Josh Bell's scale of wants than attending the University of Texas. The fact that he made statements to the contrary, while possibly true at the time, cannot be considered as anything more than a negotiation tactic. Limiting how much money a team can spend will result in fewer instances where the organization is able to meet the reservation for a player to forgo college.
  
• Baseball requires the most development time from time drafted to the actualization of tools into production. The incentive for two sport athletes to choose this option over a more lucrative sport has now been capped. Athletes with better options will flock into those sports. It is unclear at this point whether multiple sport athletes' bonuses are allowed to be spread over multiple years as in the past. Keeping this loophole intact will lessen the effect.
• With fewer high school players able to sign under the new cap, more will enter college baseball. This will certainly be good for THAT game, but we cannot assume the development will be the same at both levels. Some will benefit from delaying their pro career; others will not. Additionally, less heralded incoming freshmen will have less opportunity to emerge as draftable talent as the elite force them onto the bench as role players.
  
• The consequences of exceeding the bonus cap are pernicious, and only under rare circumstances will you see a team consciously exceed their cap figure.

4. Proceeds generated by the tax will be distributed to payee Clubs under the Revenue Sharing Plan that do not exceed their Signing Bonus Pools. Draft picks that are forfeited by Clubs will be awarded to other Clubs through a lottery in which a Club’s odds of winning will be based on its prior season’s winning percentage and its prior season’s revenue. Only Clubs that do not exceed their Signing Bonus Pools are eligible for the lottery.

• The possibility of gaining draft picks adds even more incentive for teams to heed the cap.

5. Competitive Balance Lottery

A. For the first time, Clubs with the lowest revenues and in the smallest markets will have an opportunity to obtain additional draft picks through a lottery..

B. The ten Clubs with the lowest revenues, and the ten Clubs in the smallest markets, will be entered into a lottery for the six draft selections immediately following the completion of the first round of the draft. A Club’s odds of winning the lottery will be based on its prior season’s winning percentage.

C. The eligible Clubs that did not receive one of the six selections after the first round, and all other payee Clubs under the Revenue Sharing Plan, will be entered into a second lottery for the six picks immediately following the completion of the second round of the draft. A Club’s odds of winning the lottery will be based on its prior season’s winning percentage.

D. Picks awarded in the Competitive Balance Lottery may be assigned by a Club, subject to certain restrictions.

E. Top 200 prospects will be subject to a pre-draft drug test and will participate in a pre-draft medical program.

• This looks like an attempt to slightly mitigate the damage done to the small market teams by the bonus cap. It will not do its job in that area.
• There is a slight incentive for small market teams to lose baseball games, but I think the impact will be negligible.

5f. International Talent Acquisition

1. By December 15, 2011, the parties will form an International Talent Committee to discuss the development and acquisition of international players, including the potential inclusion of international amateur players in a draft or in multiple drafts.

2. For the 2012-13 signing season, each Club will be allocated an equal Signing Bonus Pool.

3. For each signing period after 2012-13, Clubs will be allocated different Signing Bonus Pools, based on reverse order of winning percentage the prior championship season (i.e., the Club with the lowest winning percentage the prior season shall receive the largest Pool).

4. Bonus Regulation of International Amateur Players

A. Beginning in the 2013-2014 signing period (July 2, 2013 - June 15, 2014), Clubs may trade a portion of their Signing Bonus Pool, subject to certain restrictions.

B. Clubs that exceed their Signing Bonus Pools will be subject to the following penalties in the 2012-2013 and 2013-2014 signing periods:

Excess of Pool Penalty (Tax on Overage/Draft Picks)
• 0-5% 75% tax
• 5-10% 75% tax and loss of right to provide more than one player in the next signing period with a bonus in excess of $500,000.
• 10-15% 100% tax and loss of right to provide any player in the next signing period with a bonus in excess of $500,0000.
• 15%+ 100% tax and loss of right to provide any player in the next signing period with a bonus in excess of $250,000.

C. The penalties for exceeding the Signing Bonus Pool will increase beginning with the 2014-2015 signing period if a draft or drafts is not agreed to by July 2014.

5. All international amateur players must register with the Scouting Bureau to be eligible to sign, and the top 100 prospects will be subject to a drug test.

6. The Office of the Commissioner and the Union will form a joint committee to assist international players with their transition to educational/vocational programs after their baseball careers are over.

• Here the foundation for an international draft is laid. One of the few areas where an amateur was not punished for being a non-union member is not destroyed. A draft is a near certainty in the future as having 30 teams bidding on each player could very well result in teams signing only one player per year for the full cap figure.
  
• Latin players without other options are the primary losers of this new policy. It's possible that another league could eventually step in and bid them away (Japan?) but it is not likely.

Acquiring talent via the draft and international free agency is one of the few areas where small market teams could outspend the large market. Texas, Tampa Bay, Pittsburgh, and Kansas City are a few examples of teams who have taken this route. The results level the playing field as each team chooses how much risk they're willing to take. The new amateur acquisition rules throw that option out of the window. Disguised as a method for "parity," it will only result in a diminished talent level in the minor leagues, and eventually, throughout baseball as a whole. No one should be surprised by this outcome; both sides had every incentive to limit the money the unrepresented amateurs received. All that we can do as baseball fans is mourn the change and hope that Scott Boras finds a few loopholes to exploit.

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Jeff Reese is a member of Bullpen Banter. He can be reached at JReese@BullpenBanter.com or via twitter. An index of his College Baseball Notes series can be accessed here.