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Explaining the “AAV Stretching” in Recent Baseball Contracts

If you’re like me, your first impression on hearing the news of Xander Bogaerts’ eleven-year, $280 million contract with the Padres might have been “what the %#&! are they doing?” An eleven-year contract for a thirty-year-old doesn’t align with the narrative in baseball over the last decade: analytically-minded teams understand that high-dollar contracts that go through players’ late 30s or 40s are a bad idea. And while the Mets’ signing of Carlos Correa this week to a twelve-year, $315 million contract was shocking in its own right after Correa had purportedly already agreed to a deal with the San Francisco Giants, the structure of the deal was not given the contracts we had already seen this offseason.

For the Padres, perhaps signing Bogaerts for over a decade was a desperation play. They had just lost out on their reportedly preferred free-agent target, Trea Turner (more on him later). They are only a few months removed from emptying out a big chunk of their farm system to acquire Juan Soto and Josh Hader, who will become free agents themselves within the next two years. This is a team built to win now that has been all in the past two years, and if it took an eleven-year contract to get Bogaerts, the Padres panicked and felt they had to do it to put them over the top, even if it means they’ll be paying over $60 million to a 34-year-old and 41-year-old shortstop in 2033.

But on further examination, we know it was probably the Padres who pushed for the deal to go eleven years, and subsequent reports confirm this. This is due to a wonky trend emerging in baseball economics that I will refer to as “AAV stretching.” By adding more years to contracts, some teams can actually save money and create additional payroll flexibility for themselves while paying players more. Bogaerts’, Correa’s, and Trea Turner’s contracts this offseason are prime examples of this. They show that certain teams seem committed to spending at or above the “competitive balance tax” (CBT) every year, and with that assumption, are structuring their contracts in a way that saves them money while also allowing them to make more competitive offers to free agents. To understand how the math works, we need to do a quick crash course in the CBT.

A Crash Course in CBT Economics

The CBT provides that if teams exceed a certain dollar threshold on their payroll in a given year, they must pay a tax on their overages. The salary of each player on a team’s 40-man-roster counts against the CBT. An individual player’s hit against the CBT is based on the average annual value (AAV) of his contract, which is calculated by simply dividing the total salary by the number of years.

The CBT kicks in at $233 million in 2023 and there are four thresholds that increase the total tax penalty that a team pays. The size of the penalty also increases if teams pay the tax in consecutive years. The chart below demonstrates the possible penalties a team could incur for exceeding the CBT in 2023.

Teams are only taxed on the payroll dollars above each individual threshold. So if a team exceeded the CBT for the first time in 2023 and had a payroll of $253 million, it would pay a $4 million tax penalty ($20M above the $233M, multiplied by the 20% tax rate). If that same team had decided to sign an additional player for $10 million, its CBT payment would have been $7.2 million—the initial $4 million, plus a 32% tax assessed on the $10 million above the $253 million threshold. With that context, we can see why teams like the Padres, Mets, and Phillies were happy to, and likely pushed for the three biggest contracts in this year’s free agent class to span over a decade and last into the signed players’ 40s.

The Bogaerts, Correa, and Turner Deals Show AAV Stretching in Action

Bogaerts’ contract has an AAV of $25.5 million. His fellow free agent shortstop, Trea Turner, signed a contract with the Phillies for $300 million over eleven years, for an AAV of $27.3 million. Turner will be 30 years old on opening day and, like Bogaerts, the contract takes him through his age 41 season. Correa’s twelve-year deal with the Mets has an AAV of $26.25 million and lasts through his age 40 season. When we compare Bogaerts’, Turner’s, and Correa’s contracts to other recent megadeals for shortstops, an odd trend emerges.

Francisco Lindor reset the salary market for shortstops with his record-setting extension with the Mets in 2021. The deal kicked in for Lindor’s age 28 season and paid him $341 million over 10 years, good for a $34.1M AAV. The following offseason, Cory Seager signed a similar contract for his age 28 season—a 10-year deal for $325 million total, or a $32.5M AAV. Marcus Semien, who was three years older than each of them but had performed at similar levels, received a shorter deal for less money from the Texas Rangers—$175 million over seven years ($25M AAV). Interestingly, each of these players’ contracts expired after their age 38 season, creating a trend for the top of the free agent shortstop market.

As shown in the table above, Bogaerts, Correa, and Turner fit comfortably into this market of upper-echelon shortstops. They all had better contract years than Seager according to FanGraph’s wins above replacement (WAR), and Turner and Bogaerts even outperformed Lindor. [1] In the three years leading up to the signing of the contracts, Turner and Lindor are well above the pack. Semien, Bogaerts, and Correa are bunched in the middle, and Seager again bottoms out the list. If you look at each player’s average WAR in their best three years prior to signing the contract, Lindor tops the list by a fair margin, but things are tightly bunched for each of this year’s free agents, all of whom are above Seager.

Like Correa, Lindor and Seager had the benefit of becoming eligible for free agency by their age 28 seasons. Using the Lindor and Seager deals as a baseline, you probably would have expected Correa to sign a similar deal, and Bogaerts and Turner to get similar, but shorter, deals to account for the fact that the contracts were starting at their age 30 season. Based on the prevailing trend in the top-level shortstop market, these deals would be expected to take the players through their age 38 seasons—ten years for Correa, and eight years for Bogaerts and Turner.

Obviously, that did not come to pass. The older players got longer contracts than Lindor and Seager, as did Correa. While some people may point to a competitive free agent market, or factors like biomechanical research that allow for better player aging to explain this odd phenomenon, it was likely the exact opposite. It was the teams—the Padres, Mets, and Phillies—that pushed for these longer deals, not the players.

Other articles have examined this issue and pointed to financial factors like high-interest rates today to explain why teams are structuring contracts like this. And that may certainly play a role, although it comes with the counterpoint that the exact same factors would be influencing player decisions to resist this trend. It’s more likely that the driving force behind these longer contracts is to reduce the AAV of the contract and lower any potential CBT payments for the teams. These contracts make sense for teams that plan to regularly spend at or above the CBT threshold. With that mindset, structuring contracts like this allows teams to both save money and offer longer contracts to players for a higher total value, thus making them more competitive players in the free-agent market.

The Padres, Phillies, and Mets all paid the CBT in 2022. After they signed Bogaerts, the Padres' CBT payroll for 2023 is estimated to be $266 million, putting them in the second CBT threshold. The Phillies are estimated to be at $242 million, in the first threshold, for 2023. As repeat offenders, this would come along with a 42% CBT tax for the Padres and 30% for the Phillies (assuming Philadelphia stayed in the first threshold). The Mets, and their deep-pocketed owner Steve Cohen, blows both away. With a CBT payroll of $388 million for 2023, the Mets are nearly $100 million above the highest threshold that was instituted in the last CBA, and has been facetiously referred to as the “Cohen tax.” They will pay a 90% tax on Correa’s contract in 2023

An eight-year deal for Bogaerts at a $31 million AAV (slightly below Seager) would have paid him $248 million in total. An eight-year deal for Turner at a $33.75M AAV (slightly below Lindor) would have paid him $270 million. A ten-year deal for Correa at a $30M AAV would have paid him $300 million. By adding three years and knocking off 5—6 million in AAV to what the current shortstop market was dictating, the Padres and Phillies were able to significantly decrease the CBT payments they might make in a given year. The Mets were a little less “dramatic” by only tacking on two years and shedding $3.7M in AAV for what Correa might have otherwise gotten, but this comes with even higher savings due to the higher CBT threshold they find themselves in.

The up-front savings the teams enjoy now alleviates the fear that they will be “wasting” money on the back ends of these contracts by paying 40-year-olds whose skills will likely have deteriorated at that point. And from the Bogaerts, Correa, and Turners’ perspective, they get more money overall. It's very doubtful that they would come close to earning around $25 million a year in those last couple of years (age 38-41) when they otherwise would have become free agents again.

To get to the point where this structure would save the Padres and Phillies money, we need to assume that both teams are committed to maintaining a payroll over the CBT threshold every year for the life of the contracts. With that assumption, even if neither team ever went past the first CBT threshold again, the $30-$32 million in “extra” salary that came along with the eleven-year contracts pays for itself.

For Bogaerts, we can estimate that the “stretching” of his contract lowered the AAV by $5.5M. In 2023, when the Padres will pay at least a 42% CBT tax, this would save them $2.31 million. If the Padres remained over the tax in 2024 but dropped back below the second threshold, the penalty jumps to 50%. The stretching would save them $2.75M that year, and every subsequent year after the end of the contract. In total, this would save the Padres $29.8 million. If you apply a formula for the time value of money assuming a 4% interest rate, that jumps to $38 million over the life of the contract, which more than cancels out the $32M in “extra” salary that came along with adding three years to the contract. Turner’s “stretching” had an even more dramatic effect, with savings amounting to about $44 million over the course of his deal under the same assumptions. For each of the teams, higher interest rates in the short term might make these savings even more dramatic

Correa requires a slightly different analysis because it seems like the Mets are on a slightly different financial playing field than the rest of the league. Even if we assumed that the “Cohen tax” deterred the Mets from ever exceeding the fourth CBT threshold again over the life of the Correa deal (a doubtful proposition), they would pay a 96.5% tax annually if they stayed in the third CBT threshold. Lowering the AAV of Correa’s deal by $3.7 million saves the team $3.3 million in 2023, and $3.57 million a year from 2024-2035, for a real total of $39 million, or $49.7 million when applying the TVM formula.

Perhaps just as important as the calculable dollar savings is the added payroll flexibility that AAV stretching can afford teams. Lowering the AAV on a deal by $6 million gives the Padres and Phillies that much more money to spend on players this offseason if they want to continue adding to the team but not jump into a higher CBT threshold. It can mean an established reliever, a useful utility player, or the difference between an injury-prone player with upside versus an all-star when signing a starting pitcher. If any of the Padres, Phillies, or Mets want to get below the CBT threshold at some point in the future, which can be as much of a strategic baseball decision as a financial one given that exceeding the CBT in consecutive years might lead to penalties lowering a team’s draft picks, then this flexibility can be very helpful.

This strategy only makes sense for a small subset of teams that are at or near the CBT and plan to stay there for years to come. The Mets, Phillies, Padres, Dodgers, Yankees, and Red Sox were the six teams that exceeded the threshold in 2022, and all of them except the Red Sox and Dodgers already have payrolls for 2023 that are above the tax level with a few months left in free agency. It would not be surprising to see these teams continue to use this quirky trick to sign top free agents in future years as long as the CBT remains in place. If they are committed to spending above the CBT anyway, this allows them to make more competitive offers to free agents by increasing the length and total dollar amount of the contract while decreasing the actual cost to the team itself. You can say that AAV stretching is the rare win-win in the world of MLB player and team economics.

[1] Lindor’s last season before signing the extension was the COVID-shortened 2020 season. For this analysis, I prorated his WAR from the 60-game season to a full season to show what it would have been having he played at the same level for 162 games.

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