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 Secondly, the split pool portion has been replaced by a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.
For players, the news is even better. Assuming that owners behave as
rational economic beings–and there’s plenty of evidence that they behave
more like Wilma Flintstone and Betty Rubble with charge cards, but we’ll
set that aside for a moment–a lower revenue-sharing rate means the
monetary value of a free-agent signing goes up. If you think that signing
a Barry Zito will bring in an additional $20 million in annual team
revenues (thanks to extra ticket sales, increased value of your media
contract, and appreciation in the value of your Barry Zito bobblehead
collection), and your effective marginal tax rate is 40%, you’d consider
it a profitable venture to sign him if you can do it for less than $12
million (60% of $20 million) a year. Cut the marginal rate to 31%, and
Zito’s value jumps to $13.8 million (69% of $20 million) a year. By
percentage it doesn’t seem like a lot, but a few commissions like that
and your agent can buy himself a new Caribbean island.
Revenue sharing is supposed to do two things, though, and only one of them
is to force the George Steinbrenners of the world to tithe a share of his
riches in appreciation for the Royals and Devil Rays showing up to fill
the opposing dugout, and spare him the indignity of having to hire out the
Washington
Generals. The other, in theory, is that revenue sharing helps level
the playing field for talent, by giving the low-revenue teams more to
spend. And it’s here that the new CBA, like the old one, does little to
help the situation.
The problem, once again, lies in the margins. A minute ago, I proposed a
free-agent signing that would bring in $20 million a year in new revenue.
As noted, the new plan does provide low-revenue teams with an incentive to
get off their duffs and try to boost revenues–though with high-revenue
teams’ effective marginal rate dropping from 39% to around 33%, their
incentive to spend is increased as well, albeit not as dramatically.
How much a team spends, though, is dependent not just on how much revenue
it gets to keep, but on how much it can generate in the first place–and
that calculation of how much new money a player can bring in is going to
vary wildly from team to team. Even if an influx of talent would result in
the Yankees and the Royals putting the same number of new fannies in the
seats, those seats are worth two to three times as much in New York as in
Kansas City, and that’s before even accounting for the increased value of
eyeballs attracted to the team’s cable broadcasts.
This discrepancy in teams’ marginal revenue potential goes a long
way toward explaining why the top-revenue teams hog all the big names at
free-agent time. It’s not so much that the Yankees have more money than
the Twins–without knowing their actual bank balances, I’d wager that
banking mogul Carl Pohlad could outspend failed shipping magnate George
Steinbrenner if they both busted open their piggy banks. It’s that
players are worth more to the Yankees than the Twins, solely by
virtue of the fact that the Yankees play in such a high-marginal-revenue
environment.
The new plan does very little to change this. Let’s say a ten-win player
will bring in $20 million a year more for the Yankees, against $10 million a year for the Royals. Under the old system, the Yanks should be willing to pay him $12.2 million a year (61% of $20 million that’s left after revenue
sharing), the Royals $5.3 million (53% of $10 million). Under the new
system, the Yanks should be willing to pay $13.4 million a year, the
Royals $7.1 million. While the gap is reduced slightly thanks to the tax
rate changes, a player who was worth about twice as much to a high-revenue
team under the old plan remains about twice as valuable under the new one.
There are ways that MLB could have better addressed this. For instance,
instead of a flat revenue-sharing rate, they could have pegged the rate to
a team’s marginal revenue potential–in the example above, taxing the
Yankees at an effective marginal rate of 60% and the Royals at 20% would
make our hypothetical player worth $8 million a year to both teams. How to
make the calculation of how much marginal revenue a player was worth to
different teams would doubtless have been tricky to calculate, and
controversial. But there are plenty
of smart people who could have come up with such a formula–and in
any case, the final verdict would have been less a matter of
number-crunching than of sitting around a negotiating table and hashing
out a compromise acceptable to all parties, just as the 30 teams
apparently did in deciding on the fixed team rates under the new
split-pool plan. In labor negotiations, “right” is a matter of consensus,
not statistical accuracy.
Instead, baseball is left with what might be called the “Don’t make Bud
come in there rule”: Teams are supposed to make every reasonable effort to
compete, and not just sit back and collect revenue-sharing checks. (Not too
obviously, anyway.) It’s a typically old-school approach for the
old-boys cabal: Don’t sweat what the rules and regulations say; we’ll
handle our own.
We’ll know more about the full effects of the new CBA once the lawyers
actually finish putting the general agreements made at the negotiating
table into hard-and-fast rules. (There have already been some reports of
things that were agreed on by the negotiators, but scrapped once they
couldn’t be translated into legalese.) But if you’re a Royals fan hoping
that “overhaul of the revenue-sharing system” means your team will finally
have an incentive to spend with the big boys, don’t hold your breath. On
the margins, where it counts, this looks a lot like the same old deal.
Thank you for reading
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