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November 3, 2006

On the Margins

New Revenue-Sharing Rules Should Spread The Wealth, But Not The Talent

by Neil deMause

When baseball announced its new five-year collective bargaining agreement last week, it was seen as a major step forward in the sport's often-ignominious history of labor relations. Not only had the two sides struck a deal two months before the last pact expired, but here you had Bud Selig and Don Fehr sitting side-by-side at the World Series, declaring their love for each other and for the current "golden era" of baseball profitability.

For anyone trying to analyze the new deal, though, the way it was announced was less revolutionary. All that MLB and the MLBPA signed last week was a "memorandum of understanding" sketching out the broad strokes of the deal--and what was released to the press was even less than that, effectively a summary of a summary. As a result, most of the reporting thus far has necessarily been a mix of incomplete facts, rumor, and guesswork. Maury Brown began to untangle the CBA's new revenue-sharing rules on Monday. My job today is to take a deeper look at some of the implications of the new system for how teams will actually be receiving--and spending--money.

First off, a quick recap of the rule changes, as we understand them so far. Under the old system, as Maury explained, revenue sharing consisted of two separate pieces: A "straight pool" that skimmed off 34% of every team's revenues and divided equally among all 30 teams, and a "split pool" that was levied only on the top-revenue teams and redistributed to the lowest-revenue ones. (This two-headed system was a compromise put into place during the last labor talks in 2002, when the owners wanted a straight-pool plan, and the players a split one.) The overall effect was that several hundred million dollars a year was shuffled around, mostly from the rich teams to the less-rich, but with the odd effect that teams at the top of the economic ladder actually got to keep a bit more of each dollar of new revenue (giving up 39%) than those at the bottom (who gave up 47%).

Under the new system, two things change. First off, the 34% straight-pool tax drops to 31%. Secondly, the split pool portion has been replaced by a new tax that starts with a target for how much money will be shared (based on the past two years' league revenues), then assigns a fixed percentage of that cost to each of the high-revenue teams, based roughly on what they've paid out in revenue-sharing in recent years.

If that isn't confusing enough--and judging from the number of times I just rewrote the preceding paragraph, it's already plenty confusing--there's an added twist. Under the old rules, all teams with below-average revenues got revenue-sharing payments based on how far they fell below the league median. According to someone who was briefed on the new plan, from now on everybody below the league median will get the same-sized checks, with the sole caveat that no team can get a revenue-sharing check that pushes it above the midpoint.

The effect of all this fancy fiscal footwork is actually pretty clever. The total amount of revenue to be redistributed in 2007 will be exactly the same as it was in 2006. Yet because the amount each high-revenue team puts into the split pool is unaffected by increasing revenues, as is the amount that each low-revenue team receives from it (at least, until they approach that magic median), teams' effective marginal tax rate--the amount of each new dollar of revenue they don't get to keep--drops from the old 39-to-47% range down to just the new straight-pool rate of 31%. (It actually comes to a couple of percentage points lower for low-revenue teams, and higher for high-revenue ones, because of the odd effects that increasing one team's revenues has on the total amount of cash that's thrown into the pool.) The hoped-for effect: If teams get to keep more of the revenue they generate, they'll have more incentive to invest in their product, lure new fans, and grow the pie for everybody.