Major League Preview

Revenue Sharing Is Making An Impact

Common fund is spreading MLB's money around





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