The Jays botched Ryu’s contract

Nov 25, 2022 - 7:51 PM

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Last week the Blue Jays kicked off the offseason with an unanticipated moved straight of out left—err, well, right—field, trading middle of the order bat Teoscar Hernandez to Seattle for reliever Erik Swanson and prospect Adam Macko.

Perhaps this was purely a baseball move, with the Jays willing to trade a little offensive firepower with one year of control for multiple years in the bullpen, a lottery ticket to potentially help down the road, and perhaps some positional flexibility in the corner outfield as well. Only time will tell if this turns out to be the case.

But it seems at least equally as likely to be have motivated by financial considerations, with the first competitive balance tax (CBT) threshold looming at $232-million. While that’s not a hard constraint, it’s unlikely the Jays would be willing to breach it given the penalties, especially considering the salary structure is only going to escalate in coming seasons just for the core already locked in, so it would in essence be locking in escalating penalties.

Even with the subsequent non-tenders, before the trade the Jays were already pushing a $190-million cash payroll for 2023. With the roughly $20-million benefit charge that gets counted against the CBT, that left them only about $20-million to spend this winter before the trade. With a couple major holes in the rotation to fill and bullpen depth at a minimum, that was going to be a tall order. Trading Teoscar buys them more breathing room.

The CBT has never been a factor for the Jays, and so I’ve never really thought it or realized the situation for 2023 was so tight. But in thinking through the Jays’ CBT situation in the wake of the deal, I think it’s clear it could have been much less tight if the front office had been more diligent in the past. In particular, I think they botched the structuring of Hyun-Jin Ryu’s contract three years ago.

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Obviously, the Blue Jays would prefer to not to have Ryu’s $20-million salary on the books for 2023, and obviously that deal end up working out. Though the valuation was pretty stretched, the point here isn’t to debate or question the merits of signing him with the benefit of hindsight. The Jays had little in the way of financial commitments, were looking to bridge the gap to contention and for lack of a better term, show they were serious as opposed to finding the absolute best value. For this purposes, we’re taking that as given.

The real surprise was Ryu getting the fourth year given his age and spotty track record of durability. MLBTR had projected three years at $18-million annually, and FanGraphs two years with their crowdsourcing at three years with a similar salary. Outdoing the salary was probably more about the market being generally stronger, but the real coup was that fourth year.

I think we can reasonably infer how that happened. The Jays’ offer was probably at a more comfortable three years at $20-million annually, with other teams in same neighbourhood and tacking on the extra year was the decisive factor to get him to Toronto. Like with Russell Martin in 2014, when the leading offer was at four years/$16-million and the Jays went to the fifth year to seal the deal.

With Martin, that last year essentially ended up a write-off, and likewise with Ryu the expected value would be almost entirely within those first three years. Perhaps things really works out well and Ryu remains healthy and productive through his age-36 season, but far more likely it ends up a write-off to some degree. The hope being that, also like with Martin, what you get on the front end justified the hit on the backend.

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Everyone knew the young players who debuted in 2019 would remain very cheap in 2020-21, before their salaries escalated rapidly with arbitration eligibility over the 2022-25 horizon. It was less obvious that the jays would be so aggressive adding premium veterans—at least from the outside. But internally, the front office would certainly have known the type of budgetary capacity they’d have if the young players formed a contending core that drove revenues.

Taking that backdrop into account, to the extent the Jays were going to overpay Ryu, you wanted to do it in the 2020-22 window, when they didn’t come close to the CBT threshold, rather than 2023 (and beyond, though it’s not relevant to Ryu). Granted, frontloading cash payments just increases the present value of a given sum; nonetheless, we’ve seen the Jays frontload some contracts presumably to manage internal budgetary considerations.

But it would have been possible to frontload the CBT hit with a little creativity in the structure. On multiyear contracts, the annual charge for the CBT is the simple average of the guaranteed dollars over guaranteed dollars. Ryu’s contract was a straight $20-million cash salary, so the CBT charge was of course the same.

Instead, the exact same cash deal could have been structured as a three year deal for $20-million, with a 2023 team/player option for $20-million with a $15-million buyout. The Jays would first have the option of picking up the 2023 option (to capture any upside), and if they declined then Ryu would have the option (to force the $20-million guarantee).

That structure, which we’ve seen other teams use precisely to manage the CBT, virtually guarantees the option gets exercised and effectively makes it that same four years and $80-million. But since only the first three years ($60-million) and buyout ($15-million) are actually guaranteed, the CBT calculation for 2020-22 is $75-million over three years, for a higher $25-million annually. But it wasn’t a constraint then.

And then in 2023 there would only be a $5-million CBT hit remaining, even with $20-million cash due. That would have have given the Jays some much needed breathing room. It’s too bad it might now cost them in 2023.