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Speaking only of my experience with OOTP2007, the owner does "hold" way too much out for arbitration estimates. It's way over estimating the guy, and there's no where to see what that estimate is.
I saw no pattern, but on occasion it would consider an offer that was refused as an open offer... which means it considers the money in the refused contract as spent. Which seriously hampers you when you're dealing with a tight budget. It didn't happen all the time, and I never found a pattern (although I didn't really look that hard).
Another poster said this, but the $ you have for free agents is this year. The only way to see what you have available for future years is to go try to offer an extension. What you have there is what you have available for any future years... if you have 10 million available there for next year, you have 10 million available for year 3, 4, 5, 6, etc as well... even if you have no guaranteed contracts in year 3 and you budget is 100 million, you still only have that 10 million available.
From the opening post, most likely you ran into the problem in the second paragraph, and when you withdrew your offer (it might have fixed it so you had the money again but) you pissed him off.
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I don't know about you, but as for me, the question has already been answered: Should we be here? Yes!
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It's what you learn after you know it all that counts.
I firmly believe that any man's finest hour... is that moment when he has worked his heart out in a good cause and lies exhausted on the field of battle - victorious. (Vince Lombardi)
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