Understanding Deferrals Right Totally Recasts Cubs' Alex Bregman Debacle

[Matthew Trueblood]

It's important to dispel some misconceptions about contract deferrals. Once we do, the Cubs front office's failed pursuit of an elite free agent comes into focus, and it looks very different than it has been presented so far.

Image courtesy of © Kamil Krzaczynski-Imagn Images

Let's get one thing clear, right off the bat: Alex Bregman didn't get $40 million per year in his new deal with the Red Sox. That that number survived, more or less, as the widely accepted annual average value (AAV) of Bregman's contract is a damning indictment of sports media's ability and dedication to educating fans well. While the nominal value of the deal is $120 million over three years, half of Bregman's salary will be deferred for a decade or more, bringing the AAV down (for competitive-balance tax (CBT) purposes) to just under $32 million and the total value of the deal to under $100 million in 2025 dollars.

Those are the numbers that matter in this context. They're negotiable—there are two or three equally valid (though not quite equally important) ways to calculate the impact of the deferrals, so the AAV can range from almost exactly $30 million up to that $32 million figure—but they're not just castles in the air. It's not, for instance, equally valid to retreat to the face value of the deal because that's simplest. Just as Shohei Ohtani's 10-year deal with the Dodgers was not (in any important sense) worth $700 million, Bregman's deal with the Red Sox isn't worth $40 million per year.

Let's take a hard look, first, at what all that meant to the Cubs' negotiations with Bregman. Then, we'll briefly delve into deferrals a bit more broadly, so we can all talk about and understand them better, going forward.

What Really Happened in Bregman-Cubs Negotiations
Grappling with the reality of deferrals and their impact on the Bregman sweepstakes compels us to look at the Cubs' efforts to land Bregman through new eyes. Were they massively outbid here? Not by any means. As I reported a week before he signed with Boston, Bregman got an offer from the Cubs that walked right up to $30 million in AAV over four years. Since it didn't involve deferrals, that offer was worth virtually the same money per year as what Bregman got from the Red Sox. As I also reported at that time, though, Bregman was looking to top the AAV for fellow third baseman (and now teammate) Rafael Devers, at $31.3 million. The league's valuation of his deal, after factoring in the deferrals, is $31.9 million. In other words, he got the AAV number he was looking for elsewhere, even if the difference between that figure and what the Cubs were offering was small.

Compensating for that, though, was the fact that the Cubs offered one more year than did Boston. That has to count for something, so when (for instance) ESPN's Jeff Passan presented the Cubs as pushing the envelope neither in dollars nor in years, it was an oversimplification. Bregman didn't have any real interest in playing for the Tigers, so that six-year deal wasn't something the Cubs had to beat; they just needed to outbid Detroit's $28.58 million AAV. That was the number they knew for sure they needed to stay above, and their final offer got there.

When Boston came over the top, the Cubs ran into two problems, according to sources familiar with their process:

1. They refuse to go over the CBT threshold for 2025. Last year, we found out after the fact, Hoyer knowingly went past that line to sign Cody Bellinger. Going only a small distance beyond the threshold is nearly always the wrong approach, though, and the Ricketts family would not authorize crossing the CBT line again in 2025.
2. Bregman wanted the right to opt out after each year of any deal shorter than six years in length. Though the Cubs were ok with giving him multiple such options, they didn't want to let him walk after 2025—not only to avoid being too all-in on one year, with Kyle Tucker and several others also set to be free agents, but because they already face another interesting and difficult opt-out situation next winter.

That would be the one in Shota Imanaga's contract, from last year. I'll have a separate piece about that deal soon, but in short, a severe injury or (much less likely) performance collapse by Imanaga could leave them with $15 million in dead money on the books for 2026 and another difficult decision for 2027. The specter of Bregman walking away after a good season (with the Cubs having no ability to recoup value, since he received a qualifying offer from Houston and can't get another one) is only half of what worried them; there was also the risk of him becoming a worse, less movable contract than the Cody Bellinger one they offloaded for a small return in December.

Short of utilizing heavy deferrals the same way Boston did (perhaps shrinking their offer back to three years and appealing to the vanity of Bregman and Scott Boras, by pushing the phony AAV all the way up to $44 million, where they could say that only Juan Soto and Shohei Ohtani had ever eclipsed him), then, there was just no way for the Cubs to match the Red Sox. One source briefed on Bregman's thinking believed that if Chicago had offered him some version of the deal the Tigers had on the table, he would have taken it, but the Cubs never even entertained going beyond four years for him, except in structures that would have been so team-friendly as to be non-starters. A newfound wariness of deferrals on the part of Cubs ownership (they used them with Jon Lester and Jason Heyward, but are now much more reluctant, though a team source said the hardline refusal depicted in some reports based on Hoyer's remarks was a bit overstated) and the front office's unease with a post-2025 opt-out left them stuck when Boston was willing to meet Bregman more than halfway on each point.

When you heard Hoyer talk after the fact, then, what you heard in his carefully chosen words and somewhat strained tone was an effort to conceal frustration—not with Boras, who drove his usual hard bargain but gave the Cubs plenty of chances, but with his bosses and the rigidity of their budget. In his final year under contract, he went out of his way to praise ownership for being flexible and willing to spend beyond the budget they've given him if it meant landing Bregman, but the fact is that if ownership were spending what they should on this team, signing him would have been perfectly possible. Hoyer hit his head on the ceiling of his existing payroll commitments, and while some of that is his fault (he hasn't spent all of that money well), most of it is the fault of ownership. Though it doesn't look like it at a glance, they were quite close to landing him, which made not doing so all the more painful. It only would have taken a little more of the owners' unspent largesse to get this done.

How Deferrals Actually Work, and Why the Dodgers Aren't Cheating By Using Them
We should clarify the mechanics of deferred payments. A popular recent narrative is that they're such a boondoggle for big-market teams as to be a driver of payroll inequality and competitive imbalance throughout the sport; that's just not true. Deferrals aren't I.O.U.s scrawled on cocktail napkins. Once a team agrees to a deferred structure with a player, they're required to fully fund the eventual payments—in short, to keep that much money in a designated account—by the middle of the year after the actual season covered by the contract. The Red Sox have to have Bregman's other $20 million for 2025 in an intact, inviolate fund by Jul. 1, 2026, even though they won't pay him any of it until 2035.

The benefit Boston gets from the process is not boundless, then—but it is tangible, and twofold:

1. They can freely invest that money elsewhere until the middle of 2026; and
2. Even once the money goes into the fund, it can (and does) earn interest. The Red Sox (in this case; all teams using deferrals) have to submit a quarterly report to prove that they still have whatever money they eventually owe in that fund, so only low-risk investments are allowed and the team has to make up whatever losses they incur on their end, but these are huge corporations, often owned by savvy financiers. They can easily make a little bit of money even without risk, using a large lump sum they have the right to hold for a decade.

The Brewers used significant deferrals to ease the burden of the Christian Yelich deal they signed in 2020. This tool is not the exclusive demesne of the game's richest. Nor should the Cubs, who are run by the family that built TD Ameritrade and the man who founded an underwriter and distributor of corporate bonds, have any reason not to utilize them.

So, Uh, Why Aren't the Cubs in on Deferrals?
Only a fool would believe for even a moment that the Cubs or the Ricketts family have any kind of liquidity problem, and anyway, using deferrals doesn't require much liquidity. The stashed money makes money, especially for people with experience in spotting good bond investments. This is a no-brainer of a financial tool for the Cubs, just as it is for any team on the right deal. Yet, they're currently down on them. Why?

The best explanation is that the Ricketts family intends to sell the team at some point in the medium-term future. A vested obligation of $20 million or even $50 million is a small line item in an asset as big as the Cubs, but stack a few of them, and the books get messy. Messy books aren't a problem for a cash cow like this franchise—but they can make the cow a bit less appealing in the marketplace. At this point, though they'd by no means be suffering without it, the Cubs (and surrounding, interwoven real estate investments they'd desperately like you to think are separate from the Cubs) make up a major portion of the Ricketts family's net worth. They bought a team for $850 million or so, have plunged perhaps $1.5 billion of their own money into it over the last decade and change, and now have an asset worth $4.5 billion.

In other words, they've already made out like bandits, and bandits don't do especially well if they faff around and make small talk after raiding the vault. Although he's being half-dishonest and the other half of his pleas are just plain wrong, Tom Ricketts is sincere in his belief that the team isn't making as much money as he wants. If he's demurring on deferrals and limiting spending each year based on the team's revenues from the previous year (which he is), then Ricketts has at least one eye on the eventual sale of this team, for a massive profit.

Why Both Teams and Players Like Using Deferrals
One reason so many fans seem to struggle with understanding deferrals is that it's often presented as friendly to both sides in a negotiation. When (mostly thanks to Boras) opt-outs became popular about a decade ago, this same problem arose. Good messaging by agents (and the overeager repetition of what those agents say by certain key newsbreakers, especially in national baseball circles) often sells unusual contract provisions that way, because it preserves and pads the reputation of whichever agent negotiated a deal (by playing up the player's interests) and prevents owners or executives from either becoming unwilling to use a particular structure in the future or downplaying the real value of a deal in public.

In reality, though, anything that goes into a contract is likely to favor one party over the other. If trust were perfect and everyone was happy, there'd be no need for a contract in the first place. Opt-outs unequivocally and significantly favor the player; deferrals unequivocally and significantly favor the team. We should be more clear about that, and not let agent-speak get us to softshoe the downsides of each type of provision so readily.

It's fairly easy to see why teams are ok with opt-outs, which are just player options with good branding: allowing them saves them money or shortens the deal in question. Any time a player signs a contract, for each opt-out included, keep in mind that the contract was probably one year shorter and $2 million or so cheaper per year than it would have otherwise been. Since Bregman has two opt-outs in this deal, we could say that Boston effectively valued him as a five-year, $175-million player ($35 million AAV), but didn't want to incur that heavy of a CBT hit or risk paying him that handsomely in 2028 or 2029. Opt-outs work for the team when they materially cut down how much they have to pay, monetarily. Though you'd need to do something out of a heist movie to get at it, most teams and all major agencies have charts somewhere to help them codify the value of an opt-out.

Less clear, at first, is why players would be ok with deferrals. Well, maybe that's not quite right. To many fans, for whom even the $20 million Bregman will receive during each season of this deal sounds like Monopoly money and isn't especially real, the fact that he won't get the other $20 million for each season until a decade or more later doesn't land with any sense of reality. If you are reading these words, you absolutely won't be making $20 million in 10 or 15 years, any more than you're making it now, and if someone offered you $20 million guaranteed 12 years from now, you'd gladly take it, not worrying about details like inflation or opportunity cost.

The downside for a player is real, but it's mitigated in two ways:

1. It's risk-free. The team has to pay you that money, no matter what. You forfeit the right to earn interest in the meantime, or to invest it yourself and make even more, but you'd have to pay someone to manage and monitor those investments anyway, and you might pay lower taxes by waiting to get the money later, and there's always that small risk that you'll lose in the markets or on a video-game company you decide to start. Guaranteed money, even accounting for the discount rate, is nice.
2. Nobody on Earth needs as much money as these players are making. This is where the Monopoly money argument actually does hold up, a little bit. While there's still a difference between $20 million and $12 million, which is the projected real value of the $20 million Bregman will get much later for each year of his deal, it's the difference between your third-favorite grandkid ever having to take an entry-level job or not. It's the difference between flying first-class to your favorite vacation spot and getting a private jet there. It is, in other words, unimportant, to all but the most spoiled and jaded people—and while a few such people play professional baseball, the majority of such people own professional baseball teams, instead.

The only real risk a player takes on by deferring money is that of bigger-than-expected long-term inflation. If hyperinflation takes place over the next decade, Bregman's deferred $60 million might feel a lot more like $600,000, but while (gulp) the risks of that are much higher now than at any other point in the last 40 years, they're still fairly small. They're also balanced, to some extent, by the risk of deflation over the next decade—again, not-quite-paradoxically, more possible now than it has been recently, but unlikely. 

I needed to lay all this out, so I can always point conversations about deferrals back to it. This is not an especially fun or interesting topic, and it's only important insofar as comprehending deferrals is crucial to understanding what a player is actually being paid and what that means for the player and his team. Once we achieve better education on this issue (if you got this far, congrats! You're done), we should all go back to ignoring them—except in that, when a contract is signed anywhere in the league, we should confine our analysis of it to the player and their new team on baseball terms, rather than pouncing on the initial, often-inaccurate reports about the financial terms of the deal.

View full article

[SB in SC]

The angle of Ricketts selling the team is a good one that I had not thought of.  If you look at how Hoyer has operated the last couple of years it makes more sense.  Avoid long term contracts that have any potential risks, and no deferred money to players.  The books are as clean as any team in baseball after 2026 with Dansby being the only large contract remaining.   

The Cubs making the playoffs this year get knocked out early and then lose Tucker and Pressley to me is not a successful season.  

[CubinNY]

Quote

The best explanation is that the Ricketts family intends to sell the team at some point in the medium-term future. 

A far simpler explanation is the looming CBA. I don't think the Ricketts intend to sell the Cubs. They are using the Cubs to finance their extracurricular real estate speculation around Wrigley.  

[Transmogrified Tiger]

I don't really follow how deferrals would be a particular pain point if they were looking to sell the team(which I would be shocked if they were, even in the medium term).  The obligations are self-funded on the same timeline as if there weren't deferrals, so it's not as if there's a sense of sticking the new owner with the bill.  I'm sure when it comes to financial reporting it creates some paperwork, but the idea that a new owner would balk at making their best offer for the franchise(especially this franchise) because of it seems very implausible.

What I suspect is a more accurate explanation is that the team prefers to not defer money as a philosophical preference, and that preference is firm right up until it isn't.  They've deferred money on contracts multiple times as owners of the Cubs, and unless the player and agent are going to let the vanity of a pre-deferral number drive their decision, if the owners don't want to defer then there's no reason to defer.  I would compare it to a family having an opposition to paying for purchases with a credit card, it's one of those quasi-logical things that's more quirk than anything. But then if a big medical bill or plumbing emergency forces it, they use that lever.  You can see how that idea wouldn't apply in the case of Bregman, who very obviously wasn't the linchpin of the offseason where you use every tool at your disposal to ensure you seal the deal, but an attempt to be opportunistic(possibly above their previously agreed spending limits).  To torture the credit card example further, that family with a firm approach about credit cards isn't going to change their mind for a new mattress, even if it's on sale and maybe would provide some material benefits over the alternatives/their current model.

[Development DL]

Great reference piece , I always appreciate your eye on context . The  Tucker contract will be interesting,