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September 15, 2005

Lies, Damned Lies

The Hometown Discount

by Nate Silver

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Baseball Prospectus hasn't spent a lot of time lately talking about baseball's economic issues. That's a good thing, because it means that there's not a labor dispute percolating, and that the Collective Bargaining Agreement agreed to in the summer of 2002 has gone over relatively well. Baseball's revenues continue to grow. Those teams that "needed" new stadiums have, in most cases, gotten them. Salaries are accelerating at a reasonable clip, but there's none of the insanity that characterized the 2000-01 off-season, when the Dodgers decided that Darren Dreifort was a $55-million pitcher.

What's interesting is that when talk about labor discussions dies down, so does talk about "competitive balance." Although the 2002 CBA introduced the luxury tax and raised the revenue sharing rate from 20% to 34%, measures that Park Avenue claimed would help smaller market teams to compete, there's little evidence that those teams on the wrong side of the tracks have found it any easier to emerge from the ghetto. The six smallest markets with MLB teams are, by most reasonable definitions, Cleveland, Cincinnati, Denver, Kansas City, Milwaukee and Pittsburgh. Since the new CBA went into effect in 2003, and including year-to-date results for 2005, the teams representing those cities have combined for just two winning seasons in 18 tries (the 2003 Royals and this year's Indians).

Let's shift gears for a second and revisit the finding I introduced last week, that from a revenue-generation standpoint, players are worth significantly more to teams with a reasonable near-term hope of competing for a playoff spot. One of the implications of this is that teams that are not competitive, particularly ones that play in smaller markets, are at risk of joining something of a permanent underclass. When Jason Bay becomes a free agent in a few years, and the Pirates still stink, they're going to find that he might be worth $8 million per season to them, while he would be worth $10 million to the Phillies, who presumably will have gone 85-77 for seven years running and will desperately need a player to get them over the playoff bubble. If the Phillies outbid the Pirates for Bay, it's because he really is worth more in Philadelphia, not because the Pirates are being cheap.

The current CBA doesn't do anything to address this structural problem. Revenue sharing acts as a flat tax that cuts against locally-generated revenues at the same 34% rate for all clubs, rich and poor alike. If Bay is worth $8 million to the Pirates and $10 million to the Phillies before revenue sharing, he's worth $5.3 million ($8 million less 34%) and $6.6 million to those clubs respectively after revenue sharing. The Pirates will wind up with a nice check from Bud Selig at the end of the season, and Bay's salary winds up being lower than it would be with a lower revenue sharing rate. That doesn't do enough to help the Pirates keep Bay in Pittsburgh.

If baseball is serious about encouraging competitive balance, it needs to develop incentives that specifically address this disparity--that the marginal economic value of a win is higher in some markets than others. The luxury tax potentially works in this fashion, but in practice has limited application, since the payroll thresholds are set so high that it only materially impacts the Yankees, and the problem isn't really the Yankees' hegemony so much as it is the Pirates' economically-reinforcing ineptitude.

A solution that would more adequately address the problem is what I'd call a Hometown Discount. Suppose for example that baseball agrees to pay 25% of Jason Bay's contract if the Pirates re-sign him. Now the Pirates can afford to pay Bay $10.7 million per season--$8 million of which they'll cover themselves, and the remainder of which is subsidized by MLB--and they'll outbid the Phillies. Let me introduce some parameters for how such a Hometown Discount might work.

  1. Teams are grouped into different categories based on some scientific definition of market size. City population, MSA population and the presence of other teams in the market would be the primary considerations, but secondary factors like individual and corporate wealth in the area and the existence of "regional" teams like the Red Sox and Braves could also be considered. Here is my initial, semi-serious take on what some appropriate classifications might look like:

    Class A: Angels, Dodgers, Mets, Yankees
    Class B: Braves, Cubs, Phillies, Rangers, Red Sox, White Sox
    Class C: Astros, Blue Jays, Giants, Mariners, Marlins, Marlins, Nationals, Tigers
    Class D: A's, Cardinals, Diamondbacks, Devil Rays, Orioles, Padres, Twins
    Class E: Brewers, Indians, Pirates, Reds, Rockies, Royals

  2. A Hometown Discount is applied when teams attempt to re-sign their own free agents. The Hometown Discount operates by counting against a team's revenue-sharing payments. Say, for example, that the Pirates owe 34% in revenue-sharing taxes on $40 million of locally-generated revenues, or $13.6 million. They re-sign Jason Bay for $10.7 million, 25% of which ($2.7 million) is covered by MLB under the Hometown Discount program. The Pirates subtract this $2.7 million from their-revenue sharing bill, so they pay $10.9 million into the system, rather than $13.6 million.

  3. Only certain types of players are eligible for the Hometown Discount. Specifically, in order to be eligible, a player must have:

    • Exhausted his arbitration-eligible status (accumulated at least 6.0 years of service time), and;
    • Been with his current club since he passed 3.0 years of service time, without subsequently having been traded, released or non-tendered. So Jason Bay would be eligible, since he had only a fraction of a season's worth of service time for the Padres when the Pirates acquired him, but Carlos Beltran, whom the Astros acquired just before he hit the free-agent market, would not be. The Hometown Discount is intended to be applied to homegrown players.
    • Eligible players would be divided into two categories. The first time a player is eligible for the Hometown Discount, he'd be classified as Type I. All subsequent times, after the player had signed his first contract as a free agent, he'd be classified as Type II, provided that he still remained with his original club.

    Some sort of exception would need to be applied for players like Torii Hunter, who were signed to contract extensions before their service-time clocks expired, but whose extension covered some of their free-agent years. I'm not going to worry about the particulars of this for now.

  4. The amount of the Hometown Discount would depend on the team's market classification, as well as the status of the eligible player. Specifically, I'd suggest the following schedule:
    
    Market Size   Type I (first-time) Eligible Player  Type II (repeat) Eligible Player
    Class A                 5% discount                           2.5% discount
    Class B                10% discount                             5% discount
    Class C                15% discount                           7.5% discount
    Class D                20% discount                            10% discount
    Class E                25% discount                          12.5% discount
    
    My horse sense tells me that these percentages strike a good balance, enough to allow the small-market teams to retain an extra homegrown player every couple of years, without overdoing it and flipping the economic system on its head. Note that even the Yankees get some relief when attempting to re-sign their homegrown players; we want to incentivize all clubs to adopt a sustainable-growth model.

I'd like to think that the benefits of this proposal are self-evident:

  • Teams that are disadvantaged by playing in a small market get some real benefit based on real economic incentives, but only to the extent that they're reinvesting in their clubs on the field.
  • The proposal creates additional incentives for investing in scouting and development. Homegrown players will not only be cheaper during their arbitration-eligible years, but are also eligible for discounts below market-rate thereafter.
  • Churn is reduced, and more players wind up with the clubs that developed them. This is one of those places where baseball doesn't need to be a zero-sum game. Roster stability is healthy from a marketing standpoint, and it really can be alienating to see your favorite player sign with the Gotham Megapolises.

Disadvantages? The salient one from MLB's standpoint is that salaries would increase by some fraction. In the Jason Bay hypothetical, for example, Bay would wind up making $10.6 million per year rather than $10.0 million. I'd like to think that this increase would be tolerably small--the intent of the plan is to allow small-market teams to match big-market salaries, not to dramatically exceed them--and more than made up for by improved revenue generation in smaller markets.

Besides, the number of players eligible for the Hometown Discount is relatively manageable. Here, for example, are the players in the upcoming winter's free-agent class who would be eligible under the program (this list was generated by hand, and may be subject to errors and omissions):


Team       Class    Type I                            Type II
Angels       A      Bengie Molina, Jarrod Washburn    --
Dodgers      A      --                                Darren Driefort
Mets         A      --                                --
Yankees      A      --                                Bernie Williams
Braves       B      Rafael Furcal                     --
Cubs         B      --                                --
Phillies     B      --                                --
Rangers      B      --                                --
Red Sox      B      --                                --
White Sox    B      --                                Paul Konerko, Frank Thomas
Astros       C      --                                Brad Ausmus, Craig Biggio
Blue Jays    C      --                                --
Giants       C      --                                --
Mariners     C      --                                --
Marlins      C      A.J. Burnett, Alex Gonzalez       --
Nats         C      Tony Armas                        --
Tigers       C      --                                Bobby Higginson
A's          D      Erubiel Durazo                    --
Cardinals    D      --                                Matt Morris
D'backs      D      --                                --
D-Rays       D      --                                --
Orioles      D      B.J. Ryan                         --
Padres       D      --                                Trevor Hoffman
Twins        D      Jacque Jones, Joe Mays            --
Brewers      E      Wes Helms                         --
Indians      E      --                                --
Pirates      E      --                                --
Reds         E      --                                --
Rockies      E      --                                --
Royals       E      --                                --
Admittedly, this winter's is a pretty barren free-agent class, so let's look at the likely eligibles from the 2006 free agent class as well.

Team       Class    Type I                            Type II
Angels       A      Adam Kennedy                      Darin Erstad
Dodgers      A      Eric Gagne                        --
Mets         A      --                                --
Yankees      A      --                                Jorge Posada, Mariano Rivera
Cubs         B      --                                Kerry Wood
Phillies     B      Vicente Padilla, Randy Wolf       --
Rangers      B      --                                --
Red Sox      B      --                                Doug Mirabelli, Trot Nixon
White Sox    B      Mark Buehrle, Jon Garland         --
Astros       C      --                                Jeff Bagwell
Blue Jays    C      --                                --
Braves       C      --                                Chipper Jones, John Smoltz
Giants       C      Pedro Feliz                       --
Mariners     C      R. Franklin, G. Meche, J. Pineiro --
Marlins      C      Juan Pierre                       Luis Castillo
Nats         C      Nick Johnson                      --
Tigers       C      --                                --
A's          D      Barry Zito                        --
Cardinals    D      --                                --
D'backs      D      --                                --
D-Rays       D      Aubrey Huff                       --
Orioles      D      Jay Gibbons, Melvin Mora          --
Padres       D      Adam Eaton                        --
Twins        D      Luis Rivas, J.C. Romero           Torii Hunter, Brad Radke
Brewers      E      --                                --
Indians      E      David Riske                       --
Pirates      E      Kip Wells                         --
Reds         E      --                                Sean Casey
Rockies      E      --                                --
Royals       E      --                                --
The Hometown Discount proposal is designed for players like Huff and Adam Eaton and Barry Zito, homegrown guys who are popular in their local markets and who may be just outside of the price range of their home teams. By no means is it assured that these players will re-sign with their clubs--there's no amount of discount that could cover for a crazy Denny Neagle type of contract offer, and sometimes teams will have good reasons for wanting to look in other directions. But the Hometown Discount would do something tangible to level the playing field for legitimate small-market teams, both from an economic standpoint and a competitive one.

Nate Silver is an author of Baseball Prospectus. 
Click here to see Nate's other articles. You can contact Nate by clicking here

Related Content:  Pittsburgh Pirates,  The Who,  Jason Bay,  Pirates

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