After 50+ seasons i have never come across this issue so I am not sure of the correct answer.

I just went through arbitration this morning and I have gone over my player payroll budget by $2.5MM. I was expecting to trade 4-6 players during free agency and reduce my payroll by $20MM or so. At what point will the system automatically take money away from 'Prospect payroll' and transfer it into 'Player Payroll' to cover my overages?

Not 100% sure, but I believe you have until the R5 freeze.

NOPE! The owner came in an adjusted my previously set budget as soon as the Arbitration cycle ended. He added $3MM to my Player Budget by taking $1MM from my Coaches, $1MM from Prospect, and $1MM from I believe either my College or International Scouting Budgets. I don't know why they don't give you a bit of time to get under budget, considering a trade can usually take 2 days to negotiate and get approved. I already had a trade Accepted that would have gotten me under budget but it had not been approved yet by the league.

Confirming this just happened to me also to the tune of $12mm.

If the system’s order of operations had approved my trade first and then moved to budget, I was $2mm under cap. Instead, the order of operations looks at budget first. Both actions happened in the PM2/2nd cycle.

it’s actually unfair to the other League members. Instead of the defending World Series champions heading to free agency with just $2mm to spend, we have $14mm ... and only $3mm for prospects. Provides a lot of motivation for bidding on Type-A FAs.

I submitted a ticket - will see what happens.

Good luck with that.

They fixed it 100%