Revenue Sharing Is Making An Impact

Each year as spring training starts, writers trot out
their thread-worn, “hope springs eternal” stories. As the 2010 season
approaches, technically every team is on even footing. The Royals or
Pirates or Padres have just as many wins and losses as the Yankees or
Red Sox or Phillies.

And while that cliché remains true, many fans focus on the word “hope,”
or the lack of it. After the Yankees signed free agents C.C. Sabathia,
Mark Teixeira and A.J. Burnett to the tune of $423.5 million in
multi-year contracts before last season, the franchise won its 27th
World Series after missing the playoffs entirely the year before.

Aside from the fact that the Yankees actually lowered payroll in 2009
from the year prior, and they hadn’t won a World Series since 2000,
fans and executives alike carped that they “bought the World Series,”
and odds are good those calls won’t abate any time soon.

The battle of competitive balance in baseball is the game’s new holy
war. From the barstool to the water cooler, the battle continues to
rage. On one side sits the low- to mid-market fan who calls for a
salary cap and increased revenue sharing. On the other side are the
big-market clubs, headlined by the Yankees and Red Sox, calling for a
salary floor, or something in the next labor agreement that forces
clubs to spend the revenue-sharing dollars that the big clubs feed them
year-in and year-out.

Complicating the argument is that most fans have only a rudimentary
understanding of how revenue-sharing even works, and they don’t see
that baseball does have a salary cap, of sorts. While management and
union leaders debate the fine points of both revenue sharing and the
luxury tax, fans have a more basic question: Do they promote
competitive balance? The answer seems to be yes, and no. You need to
spend to go to the postseason with regularity, but if the true
barometer for baseball is winning the World Series, then being hot at
the right time can get you to the promised land, regardless of where
your payroll sits.

Eight different clubs won the 10 World Series in the 2000s, which is
the most of any major North American professional sport. In that same period,
the NBA saw five different champions, the NFL and NHL saw seven, though
the NHL did not have a season in 2004-05. Eight different clubs have
won the last nine World Series, dating back to the 2001 Fall Classic,
and the Yankees (2000-01) and Phillies (2008-09) are the only clubs in
the last decade to go to the World Series in consecutive years. No club
has won back-to-back titles.

In that same time period, MLB can boast that 23 of its teams have
reached the playoffs. Only the Expos/Nationals, Royals, Pirates,
Orioles, Blue Jays, Rangers and Reds missed out. If you tie team
payroll ranking to the equation, looking at who is making the
postseason and how often, you see that clubs at the low end of the
revenue spectrum can make the postseason, just not as often. With the
exception of Oakland and Minnesota, low-revenue clubs see an
exceptionally small window.

Consider this: of the 23 clubs that made the playoffs, the top nine in
payroll made 58 percent of the postseason appearances. That makes
sense: If you invest wisely in player payroll, you increase your
chances of making the postseason. From there, the dynamics can change.
Just ask the Marlins, Rays, Rockies, and Diamondbacks.

Payors And Payees

Revenue-sharing has been in place in Major League Baseball since
1996, and it has been tweaked along the way. In 2009, $433 million
moved from high-revenue clubs to those clubs in need of assistance. To
place this in perspective, the league saw record revenues of $6.6
billion last year.

A common misconception is that the Competitive Balance Tax—the money that teams pay
when their payrolls exceed a certain level, also known as the luxury tax—is used for revenue sharing. Luxury tax money
is redistributed, but not in the same way as revenue sharing.

Revenue-sharing money comes from two pools. One is central fund
revenue, which comes from national television and radio deals, Major
League Baseball Advanced Media, merchandise sales and the newly formed
MLB Network. Each of the 30 clubs got a check for about $30 million in
2009 through this arrangement.

The other pool is the one that has created tension between small- and
large-revenue clubs, as it is the one that transfers money between
franchises. This pool is made up of net local revenues, such as ticket
sales, concessions and media deals that each club negotiates for
television and radio. Against that money, each club is hit with a
marginal rate of 31 percent, which is applied across the board to each
of the 30 clubs. (The only exception comes if a club happens to be in
the midst of stadium construction, which temporarily relieves a portion
of its local-revenue obligation.)

After all the numbers are added up, money moves from payors (the high
revenue clubs) to payees (low revenue clubs). MLB declined to say how
many clubs were payors and payees for revenue sharing last year.
Baseball’s collective bargaining agreement simply says that a team must
use its revenue-sharing money “in an effort to improve its performance
on the field.”

While many fans see this as a loophole for owners to simply pocket the
money, both the Players Association and MLB say the wording is meant to
allow for flexibility, depending on where a club is in its development
cycle. A club could be rebuilding, and therefore need to invest in
player development at the minor league level. Or a club may see its
window of opportunity opening, and use the money to procure talent at
the major league level through free agency.

This isn’t to say that some clubs haven’t skirted the line of abusing
the system. Each club is required to file receipts outlining its
revenues, and those can be reviewed by the union. While no grievance
was filed, the union, commissioner’s office and the Marlins agreed in
mid-January that the Marlins had not been using money as required, and
would therefore increase spending at the major league level.

While both the league and union agree that clubs need flexibility in
how they use revenue-sharing money, they do have some philosophical
differences on certain specifics, one of which is paying down club
debt.

“The
MLBPA’s position is that revenue sharing should not be used to pay down
club debt,” union executive director Michael Weiner said. “We have
consistently expressed to the commissioner’s office that using
revenue-sharing proceeds to pay down debt does not improve a team’s
performance on the field.”

For management, however, the issue revolves around what they view as
practicality. Rob Manfred, MLB’s executive vice president of labor
relations, says reducing debut can help a club become more competitive.

“Overall,
the Commissioner’s view is that revenue-sharing recipients have made
appropriate use of revenue-sharing proceeds over a very long period,”
Manfred said. “Clubs at low-revenue spectrum have always gone through
cycles when they develop with less expensive young talent, in a way
like Tampa Bay did, that moves them along to field a very competitive
team. When you’re at that low-revenue period, you’re still going to be
getting your revenue-sharing. Clubs can then position themselves for a
much higher player payroll when that roster matures, and one of the
ways you may decide to position yourself is reduce your debt load so
that you don’t have to pay debt when your roster then matures.”

The problem, not only for the union but for large-market owners, is
that some clubs have not cycled out of the bottom of the standings for
years. As Red Sox owner John Henry said to the Boston Globe last year,
“Over a billion dollars has been paid to seven chronically
uncompetitive teams, five of whom have had baseball’s highest operating
profits. Who, except these teams, can think this is a good idea?”

A Soft Cap

It is true that baseball does not have a hard salary cap, where
clubs are held to a specific salary figure and not allowed to exceed
it. But the league does have a soft cap in what it calls the
Competitive Balance Tax. Each year, baseball sets a payroll ceiling—for
2010, it is $170 million in total player payroll at the end of the
season—and teams have to pay a tax rate for every dollar over the
threshold.

Luxury tax money is redistributed, but not in the same way as revenue sharing. A portion of the collected money (anywhere from the $2.5 million-$5 million) is set aside for administration. After that, 75 percent of the remaining proceeds collected each year, with accrued interest, are used to pay benefits to players, with the remaining 25 percent set aside for an Industry Growth Fund. If you ever wondered why the union signed off on a soft cap, now you know part of the reason why.

Depending on your point of view, the system works, or is woefully
inadequate. Just four teams have broken the threshold since it was put
in place in 2003: the Yankees, Red Sox, Angels and Tigers. The Yankees
have exceeded it every year, paying $25,689,173 last year, a high of
$33,978,702 in 2005, and a grand total of $174,183,419 over seven years.

By comparison, the Red Sox exceeded the threshold from 2004-07, but
have paid a total of just $13,859,779. The Angels (2004) and Tigers
(last year) have paid the tax only once. The Competitive Balance Tax is
set to expire with the current CBA at the end of 2011, though at this
point both management and the union expect it to be renewed.

Manfred sees evidence that the system works because nearly every team
in the league stays under the threshold, regardless of the fact that
some clubs could never come near it. In a sign that MLB might be
looking to further hold down salaries outside of a true capped system,
Manfred signaled that as a bargaining point, further restrictions on
player salary at the top would possibly hit the negotiating table.

“As a bargaining objective for the next Basic Agreement, given the
slower growth in revenue that the industry has seen in the past couple
of years, due to the decline in the economy, that the tax threshold is
somewhat high,” said Manfred. He then added, “Whether you keep the
Competitive Balance Tax, or work towards a cap, you have to do the math
on a salary cap. You really have to think that through.”


Maury Brown covers the business of baseball and is the founder and president of the Business of Sports Network, which includes
BizofBaseball.com.

 

Postseason Appearances by Payroll Rank (2000-09)

Club

Postseason

Appearances

Avg.
Payroll

Rank

# World Series

Apperances

WS
Wins

NY
Yankees

9

1

4

2

Boston

6

3

2

2

NY
Mets

2

4

1

0

LA
Dodgers

4

6

0

0

Atlanta

6

7

0

0

C.
Cubs

3

7

0

0

LA
Angels

6

7

1

1

Philadelphia

3

8

2

1

St.
Louis

7

9

2

1

Seattle

2

11

0

0

Arizona

3

12

1

1

San
Francisco

3

12

1

0

Cleveland

2

13

0

0

Houston

3

13

1

0

Detroit

1

14

1

0

C.
Sox

3

15

1

1

Milwaukee

1

15

0

0

San
Diego

2

17

0

0

Florida

1

20

1

1

Colorado

2

21

1

0

Minnesota

5

22

0

0

Oakland

5

24

0

0

Tampa
Bay

1

28

1

0

Majors | #2010 #Season Preview

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