Tuesday, October 24, 2006

The Good News a new MLB labor accord, the Bad News a new MLB labor accord II

Major League Baseball and the MLB Players Association Sunday night hours before game two of the 2006 World Series the two sides reached a five year extension on the collective bargaining agreement the two parties reached on August 30, 2002. The current four-year CBA which encompassed four baseball seasons (2003 through 2006) was set to expire on December 19, 2006.

Bud Selig and MLBPA executive director Donald Fehr are expected to hold a press conference in St. Louis as early as today, where games three, four and five of the World Series will be played. The Selig/Fehr press conference follows the current NBA CBA announced before game five of the 2005 NBA Finals in San Antonio. With 1,800 accredited media covering the Fall Classic, the World Series is a prefect platform for Selig and Fehr to present a united front.

There are many questions yet to be answered, but several key issues have been settled. Major League Baseball will remain the only major North American sport without a salary cap (maximum team payrolls), or a salary floor (minimum team payrolls). Revenue sharing and a luxury tax will remain in place, but it appears certain big market franchises can and will continue to spend whatever they wish on team payrolls, and franchises at the other end of the spectrum (those receiving revenue sharing like the Kansas City Royals) won’t be forced to take the money they’re receiving from their partners and put that money back into their payroll.

The 1994 baseball strike which directly led to the cancellation of the 1994 World Series was based on the owners’ insistence to share incoming revenues with players on an equal basis (down from the estimated 56 percent the players where receiving at the time) the elimination of salary arbitration and phasing in a salary cap. Once again it was ‘back to the future.’ The elimination of arbitration would have effectively tied a player to the team he was drafted by for the first six years of his MLB career with the team having the ability to control a player’s salary for that six year period.

The end result – Donald Fehr recommended the players reject the proposal which the MLBPA estimated would have cost the players $1.5 billion over the lifetime of the proposed CBA.

The year long National Hockey League lockout in large part accomplished its objective because NHL commissioner Gary Bettman had spent more than five years educating franchise owners the NHL could have a salary cap, but only if the owners remained united in their resolve. The National Hockey League Players Association made it clear to their membership, if NHL players wanted to maintain the NHL’s version of a free market system the players would have to have the same conviction the owners had. The players blinked first, NHL owners had their salary cap, tied directly to hockey generated revenue.

Gary Bettman learnt how to manage franchise owners at the foot of NBA commissioner David Stern. Bettman worked for Stern and the NBA before he became the NHL’s first commissioner in 1993. (Prior to Bettman the NHL designated a President as the head of their league). The NHL was a business run amok, 76 percent of league revenues went directly to the players. The NHL needed a new economic system or the league was faced with the real potential of collapsing as a business. Bud Selig may not be the commissioner Gary Bettman is, but Major League Baseball isn’t the National Hockey League.

The 1996 CBA included a provision of a competitive balance tax. Major League Baseball taxed the franchises with the five highest payrolls contributing to a fund that would be distributed to baseball teams at the other end of the spectrum. While on the surface the system may have made sense, “The Robin Hood affect” taking from the rich to give to the poor, didn’t include any safeguards forcing teams benefiting from adding to their payrolls.

The 2002 CBA added another ‘tax’ on teams with large payrolls, a luxury tax. Major League Baseball established what Selig believed would create a ‘drag’ on team payrolls. Teams would be tax based on a downward graduating scale. The tax would also increase each year their payroll surpassed the threshold. On September 9, 2002 the owners approved a four year CBA 29-1 (the lone descending vote where the New York Yankees).

MLB which had tried to introduce contraction before the 2002 CBA agreed to take that proposal off the table for four years. Minnesota Twins owner Carl Pohlad and the Montreal Expos (then owned by current Florida Marlins owners Jeffrey Loria) agreed their two franchises would be contracted by Major League Baseball. Pohlad and Loria reach the agreement with MLB in 2001 with Selig’s goal to contract the two franchises before the 2002 season. A series of lawsuits initially postponed that plan until 2003. A clause in the 2002 CBA included a provision preventing MLB from contracting any franchises until the end of the current CBA. It’s likely when the new CBA is announced this week MLB will agree to extend their ban on contracting franchises.

When the new CBA is announced in the next few days it will be more of the same, and in that business philosophy belies the problem MLB will face in the next five years. Esteemed baseball business analyst Maury Brown publisher of The Biz of Baseball.com in a report he prepared for Hardball Times offered the cold hard truth, the facts and the figures when it comes to who gives, who receives and what if anything happens as a result relating to the dynamics of the current MLB CBA.

The following is a breakdown, based on the plan outlined above for those that are payers into the system. To place some context behind this, these 13 clubs moved $312 million to the 17 lower revenue clubs.

Team Amount paid (millions)
New York Yankees $76
Boston Red Sox $52
Chicago Cubs $32
Seattle Mariners $25
New York Mets $24
Los Angeles Dodgers $20
St. Louis Cardinals $19
Chicago White Sox $18
San Francisco Giants $14
Houston Astros $11
Los Angeles Angels $11
Atlanta Braves $10
Texas Rangers $.035

Is it any wonder George Steinbrenner is looking for a loophole to get out of some of these revenue sharing obligations? That is a key loophole that the lower revenue making clubs will zero in on as a portion of stadium construction can be deducted from revenue sharing obligations as it is viewed as "operating expenses" and therefore falls within section 5 of the revenue sharing provision of the current agreement.

While that's a concern for the lower revenue making clubs, the payees also have to concern themselves with how they are using their revenue sharing funds.
Here are the payees under the revenue sharing system:

Team Amount received
Tampa Bay Devil Rays $33
Toronto Blue Jays $31
Florida Marlins $31
Kansas City Royals $30
Detroit Tigers $25
Pittsburgh Pirates $25
Milwaukee Brewers $24
Minnesota Twins $22
Oakland Athletics $19
Cincinnati Reds $16
Colorado Rockies $16
Arizona Diamondbacks $13
Cleveland Indians $6.0
Philadelphia Phillies $5.8
San Diego Padres $5.7
Washington Nationals $3.9
Baltimore Orioles $2.0

So, back to that provision within the CBA where clubs are supposed to use the revenue sharing monies to improve on the field performance...

The loophole, of course, is that you can "improve" your on the field performance any number of ways, be it investing in scouting, or farm systems, or what have you. The verbiage in the provision is vague, in that sense. But, let's just look at those as payees and their Opening Day payrolls and see whether the clubs are using revenue sharing dollars toward improving on-the-field product:

Club Revenue Sharing Opening Day Payroll Difference
Tampa Bay Devil Rays $33,000,000 $35,417,967 -$2,417,967
Toronto Blue Jays $31,000,000 $71,915,000 -$40,915,000
Florida Marlins $31,000,000 $14,998,500 +$16,001,500
Kansas City Royals $30,000,000 $47,294,000 -$17,294,000
Detroit Tigers $25,000,000 $82,612,866 -$57,612,866
Pittsburgh Pirates $25,000,000 $46,717,750 -$21,717,750
Milwaukee Brewers $24,000,000 $57,568,333 -$33,568,333
Minnesota Twins $22,000,000 $63,396,006 -$41,396,006
Oakland Athletics $19,000,000 $62,243,079 -$43,243,079
Cincinnati Reds $16,000,000 $60,909,519 -$44,909,519
Colorado Rockies $16,000,000 $41,233,000 -$25,909,519
Arizona Diamondbacks $13,000,000 $59,684,226 -$46,684,226
Cleveland Indians $6,000,000 $56,031,500 -$50,031,500
Philadelphia Phillies $5,800,000 $88,273,333 -$82,473,333
San Diego Padres $5,700,000 $69,896,141 -$64,196,141
Washington Nationals $3,900,000 $63,143,000 -$59,243,000
Baltimore Orioles $2,000,000 $72,585,582 -$70,585,582

So, of the 17 clubs that are receiving revenue sharing, five clubs have actually spent less than $40 million of their own money on player payroll (Devil Rays, Royals, Pirates, Brewers, Rockies), and even that could be generous as the USA Today Opening Day Payroll figures do not reflect payments teams receive as compensation in some player trades in the individual or team salaries.

The business of baseball has never been better. Major League Baseball established an attendance record for the third consecutive season. More than 76 million people attended MLB games in 2006. Heading into the 2007 Major League Baseball has national over-the-air and cable TV agreements with Fox, ESPN and Turner Broadcasting that will on average generate $710 million per year, an average of $23.6 million annually, and a far cry from $106 million each NFL team receives from their national TV agreement. Remember NFL franchises share all television revenues; MLB teams have varying local television rights agreements, creating a disparity in revenues MLB teams can generate.

Last week while in St. Louis for the National League Championship Series Selig sang the praises of how great the business of baseball is in 2006. Selig pointed out MLB generated league wide revenues of $3.6 billion in 2001. In 2006 that total increased to $5.1 billion.

"I had dreams of things getting better but, no, in many ways this has exceeded my fondest expectations," Selig said last Tuesday night in St. Louis . "This sport has more parity than ever. We have more parity than any other sport."

Give Bud credit for this, he has put in place a system that continues the free market system, penalizes franchises that consistently spend money without any regard to their teams’ payroll, and puts in place a system that provides teams at the other end of the baseball spectrum the means to build their payroll through revenues provided by teams capable of generating significantly greater revenues. The YES Network may produce more than $200 million in annual revenues for the New York Yankees, but in large part thanks to the New York Yankees, the Tampa Bay Devil Rays where sent a $33 million check by Major League Baseball. The Florida Marlins where sent a check for $31 million. The Marlins opening day payroll was just north of $14 million. Where does the responsibility lie in a system that gives tens of millions of dollars to owners who refuse to invest those revenues directly back into their product? Is it the Yankees and the Red Sox who aren’t getting it right or the Marlins and the Royals who are getting it wrong?

"It's great to hear that the sides are closing in," former MLB commissioner Fay Vincent told the Boston Globe. "It makes great sense to get something done before the agreement expires. The economics of the game are excellent -- attendance records were broken -- so there's no reason to make drastic changes. Both sides are making a lot of money. I think you have to be realistic that there's no sense in tinkering with what works."

"There are no salary cap issues, no major shift by the union. The union is still very much in control and as long as the owners are all right with that, they'll get along. I would think a big issue would be revenue sharing and the luxury tax to make sure those clubs benefiting with that spend their money on players," Vincent added in the Boston Globe report.

If the National Football League, National Basketball Association and the National Hockey
League all have salary caps and salary floors, and Major League Baseball doesn’t have that economic system in place, which system is better? The NFL shares 83 percent of all of their revenues and remains the greatest single example of sports socialism. The NBA was headed towards destruction in 1984 when David Stern became commissioner. Stern instituted a salary cap and dramatically increased revenue sharing. The NBA flourished as a result. The NHL professional sports version of The Franciscan Sisters of the Poor had no choice but to force economic controls on their owners. In each case the salary cap came after protracted labor stoppages.

The difference between the MLBPA and the player unions in the other three so called major North American sports is in the determination and resolve of the players. From that first fateful day Marvin Miller was elected as the first executive director for the MLBPA, Miller instilled in the players an understanding how they could move forward in the free market system.
The average player salary in 1966 was $17,000. Ten years later in 1976 (the last year before free agency, but with salary arbitration in place) the average salary increased to $51,501. Five years later in 1980, the average salary increased to $143,756. The average player salary was $1.1 million in 1995, the first season after the 1994-95 strike. It rose to just under $2.3 million in 2002 and will be about $2.7 million this year. The average likely will top $3 million next year or in 2008.

Will Major League Baseball ever see a salary cap – it now appears unlikely. The reality is, the system is working better then it ever has. If you’re a fan of the Boston Red Sox or the New York Yankees your teams generate enough revenues they can afford to pay whatever they want for players, and if they’re taxed so be it, they can afford that too. Baseball fans shouldn’t care what happens in Boston or New York . However, if you’re a baseball fan in Kansas City or Miami and you’re upset your owner claims he doesn’t generate enough money to field a competitive team, just make sure your team is at least spending all of the money they’re being sent by Major League Baseball as part of the leagues revenue sharing program.

For Sports Business News this is Howard Bloom. Sources cited in this Insider Report: The Upcoming CBA and the Battles Within It (Part 2) - Revenue Sharing (Hardball Times, written by Maury Brown), The Boston Globe and Revenue Sharing in Major League Baseball by Matthew Ryan McCarthy

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