MLS Offseason Crash Course 3: Budget Tricks and Economic Considerations of Designated Players

In the first of the series, I outlined the syllabus and discussed an overall framework for us to use for determining optimal strategies in all the various MLS Roster Rules (all else equal, maximize league-funded wages), each of which is a post in this series.

In the second, we took a deep dive into allocation money and by analyzing some real world transactions articulated what I believe to be the right and wrong things to do with allocation money.

In this one, we’re going to talk about the fun stuff: Designated Players. Quickly, every player registered to a 2017 club roster in MLS must either 1) make less than $480K in wages, 2) make between $480K and wages and $1M but have allocation money (league-funded) applied to reduce his wage down to $480K, or 3) make more than $480K and be tagged as a DESIGNATED PLAYER. It’s always one of those three things.

So if you’ll remember from the first post, most of the disparity in wages between MLS clubs lies in the signing of designated players. It’s nuts. Some teams spend multiples of an entire MLS roster on three players. Some spend just over the max charge for a DP. Others don’t sign them at all. Here are the DP wages by club:

My math says 57 designated players (9% of the league) make $105M (49% of MLS total wages). That is some real wage inequality, and I don’t bring it up to make a political statement. I bring it up because since half of the leagues wages are going to a handful of players (and an even greater share of league resources when you consider transfer fees), if you’re an MLS club front office, it is really important to get these signings right. First, from a footballing perspective...

This part I don’t have much of an answer for. Talent identification and team fit are difficult things to master. I know what I would do, but I don’t have any fancy trick here: spend real money on scouting and analytics to reduce risk of huge mistakes and spend in positions where true excess talent scarcity exists (most likely attacking positions).

But beyond what is mostly a football question (how do I find elite players), there remain other important questions:

1. How best can I strengthen my team as a whole through optimizing MLS Salary Budget rules with regards to designated players?
2. Economically, how best can I increase the likelihood of seeing a return on my investment in for a designated player?

As best I can tell, the answer to both of these questions is one in the same: sign “Young Designated Players.” I’ll give my reasons for why.

Young Designated Players as Optimizing Broader Team Strength

First from the perspective of optimizing broader team strength, each designated player carries with him a budget charge (towards the $3.8M cap) of $480,625, unless the player remains 23 or younger throughout the MLS season in which case the charge is $200K (less than half the normal charge), or if he’s under 20, the charge is $150K. This is jarring. If a team signs 3 young designated players, as FC Dallas has done, the total budget charge is $600K instead of Chicago’s $1.44M. That’s 840K of salary cap savings to be used to strengthen one’s team in other areas. That’s one David Accam or Sascha Kljestan, or 1 Carlos Carmona and change. This is real money and appears to be a mostly free lunch. Clubs should eat it. To hammer home the point, signing three “old” DPs (which is what most teams do) clogs up between 30% and 38% of a team’s budget (depending on whether they’re operating right at the nominal $3.8M cap or wisely using TAM to increase their total to $5M or around there) whereas signing three young DPs might account for only 12-16% of a team’s budget, regardless of how much these guys make!

To use an example that’s close to home. Atlanta’s designated players in 2017 were:

• Miguel Almiron on $2.3M in guaranteed comp (rumored $8M fee) - Young DP
• Josef Martinez on $1M+ in guaranteed comp. (rumored $3M fee) - Standard DP
• Tito Villalba on $770K in guaranteed comp. (unknown fee, possibly free) - Young DP

Atlanta saved $560K of additional cap room to use on other players because of the two young designated player tags saving $280K per tag. Think of the veteran leadership Atlanta were able to sign because of this (Jeff at $175K + Parkhurst at $325K = $500K). In fact if we sort the Atlanta United roster high to low on 2017 budget charges, Almiron and Villalba were 7th and 8th on the team, behind Martinez, Carmona, McCann, Jones, Parkhurst, LGP, and Guzan. This is the model for optimizing a team’s budget through young DPs.

Young Designed Players as Return on Investment

Second, in terms of real economics, because designated player wages and transfer fees are actual incremental investments made into the league by the individual club owners, some (though certainly not all) owners may desire an actual return on this investment. If we think of transfer fees as assets rather than expenses, the goal might be to recoup the initial transfer fee or more ambitiously to ultimately sell the player for more than the initial transfer fee (a gain on sale). If a team were to A) maximize its use of league-funded wages (salary cap and allocation money) and B) consistently make good investments in designated players that succeed in MLS thereby generating large transfer fees when ultimately sold overseas, well...that would be nice I guess.

Finance 101 suggests that if you want higher returns in an efficient market, you normally have to accept higher risk. Put aside for a moment that you might be able to find inefficiencies in the market through superior scouting and analytics (hello, Lucy Rushton!). If as a thought experiment, we start instead by assuming every potential signing out there is being valued appropriately, at the right “fair market value,” then young DPs are where the additional risk and the additional return are to be found, all else equal. If we continue with the assumption of an efficient market, transfer fees will be higher for players on long term contracts and for younger players (because the potential for a future sale to offset the initial cost of the transfer fee is more likely for younger players whose abilities typically increase over time than it is for older ones whose ability declines in later years). Further, let’s put aside for a second the opportunity to sign an out-of-contract young player worthy of a DP spot (in terms of wages) — because this would be ideal, and I assume this is rare as good players normally have their contracts extended by their clubs lest the player leave on a free.

So we’re left with the example of a younger player (say 21-22 years old) on a multi-year deal who has a high ceiling but no guarantee he’ll be a success (if his success was guaranteed at such a young age he would not be headed to MLS): he will command a significant transfer fee (let’s call it $6-8M), but the reason for this is precisely that he has the potential to command a higher fee when he departs. If things go well, the club will ultimately profit (excess return) in the accounting ledgers in addition to achieving success on the field. If they go poorly, because he’s still young, the team might still ultimately recoup most of the initial fee, but they will have likely suffered on the field (excess risk).

We can contrast this scenario to Toronto’s signing of a 27 year old Michael Bradley for $10M. In this transaction, Toronto essentially accepted the trade-off of lower risk and lower financial return. They knew what they were getting in Bradley, at the time likely to be one of the top two central midfielders in the league, and they paid a hefty transfer fee AND in doing so gave up the potential for a future profit on the sale. Assuming Bradley’s deal extended to 2018 or around there, the chances of Toronto selling him outside the US for $10M at age 31 were basically zero.

Another example might be Robbie Keane, signed by LA Galaxy from Spurs for $3-4M at age 31. Keane was certainly a success on the field, perhaps the most successful designated player in league history. But there was no chance of LA recouping the transfer fee (a fee that was admittedly smaller because of his age). This type of transfer fee is more of an expense or cost of doing business than an investment, but with it comes low-risk significant contribution to the team. Basically while success on the field depends on how good a club is at identifying talent (and older more established DPs are easier to identify), the underlying economics of a young designated player signing are better than those of an older player.

Once more on broader team strength

I forgot to mention that when an MLS club sells a designated player to a club overseas and receives a transfer fee, the club is allowed to keep all of the transfer fee up to the point that the initial player investment (wages + fees) are recoup’d. All amounts in excess of the initial amount are split ²⁄₃ to the club and ¹⁄₃ to the League. Of the remaining ²⁄₃ share of the profit, a team can assign up to $650K of the profit to general allocation money with the rest spent on non roster-related items (facilities, academy, etc). This is all too much math, but suffice it to say, there is one last advantage to signing a younger designated player (beyond 1- the Young DP budget charge loophole and 2- the overall ROI dynamics), which is that when a player is sold for a profit there is this last final way to increase the broad team strength (measured in league-funded wages) by $650K of allocation money, which again we can think of as roughly “one Carlos Carmona” worth of cap space.

In summary, a good plan:

1. Sign 3 Young DPs instead of 3 old DPs and strengthen team with $840K in cap savings
2. Sell young DPs in prime years to recoup investment or in ideal scenario to create profit
3. Allocate up to $650K of profit on player sale to GAM to further strengthen team.

2018 and Atlanta United

While Atlanta United enjoyed the incremental salary cap benefits of signing young designated players in 2017, both Almiron and Villalba are 24 for 2018 season record keeping purposes, and this means each of them comes with the full $480K (or 2018 equivalent) budget charge next year. This is really important because the $560K of cap space savings referenced above for 2017 disappear in 2018. These losses have been partially offset by the jettisoning of Kenwyne Jones, Tyrone Mears, and Mark Bloom, but with all sorts of other roster decisions to be made including the potential exercise of multiple loan options, all the while preparing to take a full year cap hit for Guzan instead of the half year 2017 charge, it’s a significant impact.

One thing that keeps getting floated around in the comments sections and on twitter is the potential buying down of Hector Villalba’s wages ($770K) to the max using TAM in order to free him off that designated player spot and sign a new DP. For a while the discussion was that this might be the mechanism Atlanta United would use to bring Yamil Asad back. But in the mean time, Asad has returned to Argentina and thanked the fans in what many are speculating to be a goodbye, and rumors of Atlanta United having already committed designated player type funds just for a security deposit to potentially sign 21 year old Lucas Rodriguez. What looked like a plausible option (spend $300K of TAM to buy-own Tito and take the $480K hit for each of Asad (DP) and Tito, now looks like an inferior roster move from a financial perspective to the possibility of bringing in a Young DP in Rodriguez and the lower $200K cap hit that comes with him. With LucRod, ATLUTD could save $280K against the cap, to be used to broadly strengthen other parts of the roster.

While I was drafting this post, rumors began surfacing that Atlanta United was preparing to bid record-breaking amounts for 18 year old Ezequiel Barco. If this comes to pass, he would qualify as a young DP with an even lower budget charge of $150K (as he’s under 20 years old). If Almiron were to stay, this would certainly involve the buying down of Villalba’s charge to free up a spot and in return create $330K in budget savings (relative to a standard DP charge). The LucRod rumors and Barco rumors both point towards Atlanta United’s further optimization of the young DP rules. Sounds like a plan to me.

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 still do not exist).