MLS Offseason Crash Course 2: Proper and Improper Uses of Allocation Money

Differences in Wage Spend

In last week’s introductory class, we discussed the concept of self-imposed parity in MLS, namely the $3.8M 2017 “Salary Budget” that each team is required to stick to. We looked at actual total wage spending to see that there are vast differences in total wages between teams, and noted that while the vastness of this range ($5M on the low end to $23M on the high end) is mostly a function of each team’s three designated player signings, once the excess DP wages are stripped out, there’s still room to maneuver within the overall pool of league-funded wages as shown below:

Further, we discussed that an overarching principle we’ll use throughout the rest of these posts is that because league-funded wages are not incremental to a club’s financial investment in the league, all else equal, it should be better to have a higher league-funded wage bill than a lower one. On the whole, higher league-funded wages suggests you have created a stronger team relative to the rest of the league without taking on any additional club-specific financial risk (since the league has funded these wages through the salary cap and allocation money mechanisms).

You may notice in the above graph that each and every team utilizes more league-funded wages than the nominal $3.8M salary budget would suggest. A small amount of this overage is due to the above graph including the 8-9 supplemental and reserve players on each team that include Homegrowns, Generation Adidas and low-earners (these players average $75K annually, so you can mentally lop off $600K from each bar above if you want to). The remainder represents the allocation of league-christened GAM and TAM currency used to reduce the salary budget charges for each team to comply with the $3.8M cap. We’ll focus today on Targeted Allocation Money because it seems to be the most plentiful, but the concepts we’ll discuss should apply to both.

Targeted Allocation Money

Much like the allotment of $3.8M of league-funded salary cap space to each team (think of this as the combined MLS Partnership funding $83.6M of MLS wages, distributed evenly to each team), Targeted Allocation Money is periodically approved by the league as additional league funding with which to apply to each team’s wage budget provided they are applied t high earning player profiles (players that make between $480K and $1M). Note: The full MLS Roster Rules can be found here. These TAM funds expire after 4 transfer windows (2 seasons). See below for a breakdown of known past TAM infusions and rumored future ones:

Three Ways to Use TAM

As a baseline, TAM means we should probably think about each team as having a salary budget of something like $5-6M instead of $3.8M. Additionally, TAM can be used in a few ways: 1) to reduce a TAM eligible player’s salary budget charge, or 2) to reduce the budget charge of a transfer fee paid to sign a player (the fee would otherwise count against the cap when paid - and potentially trigger a player being tagged as a DP), or 3) TAM can be traded to another MLS team for an MLS player contract or other league asset (e.g. a draft pick, or an international slot). In my eyes, two of these uses are preferable, and one is not. Let’s use some real world examples to help illustrate.

2017 MLS Player Signing Examples

Consider three recent MLS transactions:

1. Victor Vazquez - Transfer to Toronto ($2M fee) - $700K wages
2. Carlos Carmona - Out of Contract to Atlanta (No fee) - $750K wages
3. Dom Dwyer - MLS trade from SKC to OCSC ($1.6M in allocation money) - $670K wages

In the first example, Toronto uses $2M of targeted allocation money to sign Victor Vazquez on $700K wages. In substance Toronto commits to spending $220K of TAM per year to make his wages compliant against the individual player max of $480K plus they use $2M of allocation money to reduce the impact of the transfer fee on their roster budget in 2017 (in general, acquisition costs hit the budget in the year in which they are paid, unless reduced by TAM or GAM). They have signed a very good player and have increased their league-funded wage bill with TAM by $220K per year above the $3.8M cap. This increase was partially offset by the TAM applied to reduce the $2M transfer fee, TAM which otherwise could’ve been used to increase the team’s league-funded wage bill over the next couple years. But importantly, TFC did not increase a competing MLS team’s wage potential by trading another team TAM. Instead they “used” the TAM (think of it like trading in their TAM to the league office for a stamp of roster compliance approval on the transaction).

Note: I’m unsure of what the actual transfer fee was for Vazquez, so consider this a hypothetical example if you must. Twellman said something on the playoff broadcast the other night about $400K and I’ve also seen it was a free...(which would look more like example B).

In the second example, Carlos Carmona is out of contract, and Atlanta signs him. Atlanta commits to using $270K of TAM per year to make Carmona’s wages compliant against the individual player max of $480K. Atlanta United has increased its total wages at no incremental cost to club ownership (TAM is funded by the league). Importantly, they did not increase a competing MLS team’s wage potential. Instead they “used” TAM to reduce Carmona’s salary budget charge to $480K (the max).

In the third example, Orlando City trades $400K of General Allocation Money, $500K of Targeted Allocation Money and $700K of future allocation money to Sporting Kansas City in exchange for Dom Dwyer’s MLS contract being assigned over to Orlando City. Orlando City commits to using $190K or so of TAM per year to make Dwyer’s wages of $670K compliant against the individual player max of $480K. Additionally, Orlando City has lowered their total potential wage bill by $1.6M over the course of a couple years relative to the league as a whole (and specifically, they’ve lowered their total potential league-funded wage bill by $3.2M relative to SKC, who just received $1.6M of potential cap room to play with).

My General Rule

Quickly, let me just reiterate that these posts are 100% my interpretation of optimal strategies based on the rules as I read them. I don’t want to represent that these are commonly held views or even views that are shared among the other contributors at DSS. Warning: takes. If this bothers you, and you simply want to read the literal MLS rules, click here (don’t).

Anyhow, you can probably tell that I believe trading allocation money to another MLS team to be undesirable. And specifically, trading cap room to another team in order to acquire a player who requires a lot of cap room is dubious. So, as a general rule, I think of acquiring “out of contract high earners” and reducing their budget charges with allocation money to be optimal (and admittedly this population of good free players is small). I consider using allocation money to reduce the charge of a transfer fee paid for another player outside of MLS to be a necessary evil and definitely acceptable (as it does not increase another MLS team’s total wage potential). Trading allocation money to other teams for players is bad. And importantly, these overall trading rules work for general allocation money (which can be used on any player) as well as targeted allocation money (focused on high earners).

I should note that I had a lengthy chat (thread) with Paul Tenorio on twitter who disagreed that this rule is always true:

He holds that sometimes an intra-league trade for a player can be valuable. Note, he later corrected that the GAM Chicago paid was $400K not $250K, but I don’t think that damaged his point. I think there’s a debate to be had about whether the GAM paid to RBNY and the wages paid to Dax (around $400K) exceed something comparable one could find on the global player market. I’m less of a believer that Dax is some kind of one of a kind talent for the money. But I will yield that because MLS is single entity and collectively bargained and contracts are traded freely between MLS teams without the contracts being torn up and created anew like they are after most transfers around the world, it’s possible that a team could find value in an MLS player contract that is favorable (say if he was underpaid relative to market prices). Even still, the trade-off would be between 1) “paying” for this favorable contract by sending allocation money/other assets to another MLS team OR 2) paying fair market value whether in fee or in wages for a comparable player on the global market (and not giving your competition additional wages to play with). It’s similar to the idea that expansion teams in most cases would prefer more allocation money than to draft 5-10 unprotected players from other MLS teams. It’s partially because they can take the allocation money and apply it to fees and wages they transact for out in the vast global player market. Part of me thinks that domestic players may even be largely overvalued in MLS relative to their international peers, solely because of roster requirements around international slots and the like (a post for another day).

Lastly, I’ll mention that I recognize there is a real world trade-off between spending money on the scouting and analytics necessary to fully make use of the global player recruitment market and not doing that (and perhaps in not doing that, finding value in the familiarity of MLS players). So one way to caveat the basic rule I’ve developed is to say it’s a rule that applies to ambitious MLS clubs that are willing to invest in the types of things that good soccer organizations do: scouting, analytics, recruitment etc. Old world MLS clubs may find comfort in trading a league-funded asset to another team for a player they know a lot about, maybe a player that recently scored against them and that they wish they could sign to their own team.

Conclusion

In summary, a major driver of the difference in league-funded wage bill between teams is allocation money. As a general rule, DO acquire allocation money and use it to reduce your own players’ budget charges thereby increasing your total league-funded wage bill relative to other MLS teams. DO NOT trade allocation money to other MLS clubs allowing them to increase their league-funded wage bill relative to your own. If a team offers you allocation money for one of your players, consider whether there is a replacement player available on the global market, allowing you to take the TAM and apply it to the player’s replacement (a potential upgrade).

Even though there are many players in MLS on other teams that I’d love to have on Atlanta United, I would not trade allocation money for most of them. Trading draft picks and other assets is acceptable, as will be discussed in later posts.

Next week...

We’re going to talk about Designated Players. A teaser:

As always, if you have questions or want to cover certain topics in upcoming posts, email me at TiotalFootball@gmail.com or tweet at @tiotalfootball. There’s a summary of the overall Front Office Manual over at ATLUTDinsight.wordpress.com but I’ll touch on all of that and more over here as the MLS offseason roles on (nope, these playoffs do not exist).

Postscriptum: TAM on transfer fees vs TAM on wages

It strikes me that this tradeoff between wages and transfer fees is not something new to MLS. in world soccer, clubs might try to manage their team wages to a figure, and then also try to break even in any given year between transfer fees paid for incoming players and transfer fees received for outgoing players. And this balancing is smoothed to some extent by the common practice of amortizing transfer fees over a player’s guaranteed contract.

MLS by contrast, lumps transfer fees and wages together into a total team budget for salary cap purposes. This is odd in its own right, but even more important as it relates to the general rules we developed in the above post because transfer fees are a necessary part of the global player market. And yet, MLS does not have a history of “selling” many players overseas. So this natural balance that you would need in order to keep transfer fees from blowing up your salary cap (offsetting them with transfer fees received for outgoing players) isn’t really there in the current operating model (which we’ll hopefully critique in later posts). Instead, it makes it all the more important to acquire GAM and TAM from your competition as the only repeatable way to balance against the necessary cap hits for transfer fees.

Also, as TAM infusions become larger and larger (as Paul Tenorio reports may be happening), the built-in gravitational pull of league parity becomes stretched. Differences in decisions around what to do with TAM and GAM will have greater impacts on team strength and we might start to see the “smart front offices” pull ahead even further than the others, to the extent that the chanciness of the sport itself allows for that. With more total TAM in the game, if I’m an ambitious front office that employs scouts and analysts generously, I’d be licking my chops at any trade offers for my players that include allocation money. More TAM would mean more opportunities to strengthen my team relative to my peers.