Nolan Arenado's New Team... and New Contract
This week, the inevitable finally happened: the Colorado Rockies continued their decline by finally parting ways with Nolan Arenado. This was bound to happen. The Rockies have struggled to maintain relevance and are saddled by the enormous contract that was offered to their superstar third-baseman. By contrast, the St. Louis Cardinals have an opportunity to capture the NL Central— a division littered with mediocre teams attempting to do just enough to stay alive. But unlike a lot of my posts, this one isn’t about teams failing to contend or other teams faking contention. Instead, this is about the various contract changes that were made in order to facilitate this trade from Colorado to St. Louis.
As it stands today, Arenado is owed $199M over the course of 7 remaining years on the contract. However, in order to enable financial flexibility for the Cardinals, the Rockies have agreed to send $50M to St. Louis. The optics of this are not pretty: Colorado has essentially paid St. Louis $50M to take their best player. If I were a Rockies fan, despite the fact that fans now celebrate rebuilds more than products, I would not be happy.
Beyond the $50M gift from the Rockies, the Cardinals also benefited by Arenado agreeing to defer some money in his contract. This affords the Cardinals even more financial flexibility but begins to raise some questions around the luxury tax implications of the deal. If Arenado’s deferrals are not interest-bearing, then MLB will only tax the present dollar value of the deferrals. Essentially, the money is worth less later than it is now — due to inflation and other factors— and therefore, if the absolute value of the deferrals isn’t adjusted, the Cardinals may be able to sneak out a little relief from luxury-taxable payroll. It isn’t entirely certain how the deferrals in Arenado’s new contract will work, or how much money is to be deferred. But, this situation is certainly something to keep an eye on.
In exchange for taking these deferrals and helping his new club, Arenado receives two main benefits. First, Arenado receives an extra opt-out in his deal. In addition to being able to opt out after the upcoming season, Arenado can also exercise an option to enter the free agent market after 2022. And while Arenado may be heading on his age-32 season after that second opt-out, a few good years in St. Louis may tempt him to test the market and secure a contract for age-36 and beyond.If Arenado chooses to stay however, the second benefit comes his way. Should Arenado not opt out, then the Cardinals will tack on an additional year valued at $15M to his contract, guaranteeing him slightly more compensation.
All this considered, the contract restructuring, new options, deferrals, and additional years certainly may draw the attention of the MLBPA. If we remember back to 2003, Alex Rodriguez nearly became a Red Sock (Red Sox? Member of the Boston Red Sox?) before the deal was objected to by the MLBPA. In order to facilitate the trade, Rodriguez accepted $4M less in salary per year over 7 years. In exchange, Rodriguez received opt-outs for every year from 2005 to 2010, as opposed to just after 2007 as was previously negotiated.
Generally speaking, this is quite similar to what Arenado’s camp has negotiated. Deferred compensation— potentially without interest in order to reduce salary cap burden— in exchange for one additional opt-out. In 2003, MLBPA objected to the Rodriguez trade, but in this case they seem to be on board. Maybe this is because Arenado is taking on deferrals as opposed to forgoing the money entirely. Maybe this is because the Cardinals sweetened the pot by adding in an additional year to the deal.
However, the precedent this sets— that players can renegotiate contracts in order to make teams’ lives easier and in order to facilitate trades— may not be one that MLBPA wants to establish. Regardless to the additional benefits offered to Arenado, there is certainly a team-friendly bent to this restructure and as a labor union, the MLBPA’s attention will turn to this deal for the weekend. I would be surprised if they object to the deal, as all indications point to the union signing off. But as teams seek to find more financial flexibility during the pandemic, MLBPA may face an issue like this again soon.
Over the course of the next few days, perhaps further details will emerge on the Arenado trade and the analysis above may ultimately be rendered moot. But for now, the financial gymnastics that are being performed to bring Nolan Arenado to St. Louis are worth our attention as they represent an interesting case of labor adjusting for capital.