I've found that keeping the AI's roster small is the key - I do the house cleaning you describe on a yearly basis, then goes as far as to delete any players that clearly won't get a chance in the majors and won't be considered for the hall.
Also, you may be drafting too many players - the rule of thumb I live by in my league(s) is 45 players per team. So for a 20 team league, I should have a total number of players somewhere around 900, including free agents. I choose the number of draft rounds by seeing how many players retire (always one year off, as you have to set the # of rounds prior to ending the season; the retirees list doesn't come out 'til the following season) plus the number of deletes (usually 5-15). I end up with most of my drafts being 3-5 rounds.
Using this method, the league has developed a lot of talent, with a good deal of late-round sleepers making it to the pros
Hope that helps
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