Friday, October 27, 2006

Inside the latest MLB CBA

With the St. Louis Cardinals taking a commanding 3 games to 1 lead over the Detroit Tigers after last night’s 5-4 Cardinals game four win, weather permitting the 2006 World Series could end as early as tonight if the Cardinals win game five of the Fall Classic.

Parity has become a watchword for this years’ Fall Classic. When the St. Louis Cardinals or Detroit Tigers are crowned world champions, it will mark the seventh consecutive season a different Major League Baseball franchise has won the World Series. Taking a page from the David Stern playbook, Major League Baseball like the NBA did during the 2005 NBA Finals choose their championship series as the perfect platform for their new collective bargaining agreement. Baseball had an unwritten rule, major announcements where frowned upon during the World Series. With 1,800 accredited media covering the World Series, MLB commissioner Bud Selig showing some forward thinking by utilizing the World Series as an opportunity to highlight how strong a business baseball has evolved into.

When all the dollars are finally counted from the 2006 season, Major League Baseball revenues are expected to exceed $5.2 billion. MLB established an attendance record for the third consecutive season. In America’s three major cities – New York, Chicago and Los Angeles, the six franchises collectively sold more than 20 million tickets. Media pundits who compare baseball’s recent economic success and compare MLB to the NFL are comparing apples to oranges. The National Football League generates $3.75 billion annually in television revenues, greater then annual the collective totals for the NBA, MLB, NHL, NASCAR, NCAA and the last two Olympic Games combined together.

The five year collective bargaining agreement represents somewhat of a labor breakthrough on a number of different levels for the Lords of the Diamond. MLB and to endure eight labor work stoppages before reaching an eleventh hour four-year agreement on August 30, 2002. The five-year agreement the players and owners announced Tuesday is the longest labor agreement in MLB history since the two sides negotiated their first CBA in 1968.

The ‘guts’ of the five-year agreement is remarkably similar to the four-year accord that was set to expire on December 19, 2006. It would appear, MLB have moved on from what would have been the most contentious issue they would have ever attempted to force on the players – a salary cap. Teams will be free to spend whatever they wish, teams that exceed certain thresholds will be taxed – call it the Robin Hood Clause. Taking from the rich and giving to the poor. The formula remains – the top 13 revenue generating MLB franchises contribute to a fund that benefits the bottom 17 revenue generating franchises.

The CBA ‘primer’ provided by Major League Baseball, hints at some small but important changes with the new CBA. Revenue sharing and a luxury tax make perfect sense, as long as the teams taking are spending. The Florida Marlins received close to $56 million this year, when the Marlins revenues from revenue sharing and baseball’s national television deal are combined. The Marlins remained competitive for most of the 2006 season, on a team payroll of less than $15 million. Under Jeffrey Loria’s ownership the Marlins have consistently traded away their established players for prized minor league players from other teams. In theory that system makes sense if you trade for the right players, and then sign those players to long-term contracts. That was the philopshy the Cleveland Indians won the 1997 American League pennant with, they had seven years of winning baseball, and filled Jacobs Field for a major league record 455 consecutive game sellout streak. The Marlins haven’t showed they’re prepared to follow that mind-set. Loria seems content to build a team, and then dismantle that franchise as soon as some of his better young players become eligible for salary arbitration, certainly once they qualify for free agency after their sixth season. It’s a mindset that flies in the face of the rationale behind the “Robin Hood Affect”.

Under the executive summary released by MLB Tuesday – included the following vaguely worded statement -- Provision requiring revenue sharing recipients to spend receipts to improve on-field performance retained with modifications. At the press conference held before game three of the World Series a member of the media asked MLB Players Association executive director what those changes are in the new CBA?

“I think that there are two things. First of all, you obviously have a generalized concern when you look at what the landscape is. Having said that, we have always believed that the best way to do that is to create the right kind of positive incentives, not negative incentives. And one of the things that the 31 percent marginal rate does in terms of revenue sharing, which is 17 points lower than it was for recipients under the prior agreement, we think gives them a big incentive to raise revenue. You don't raise revenue very long without having a better team on the field. We think that does it,” Fehr said

“There also were some modifications in the other language relating to enforcement of that provision just to make sure that if circumstances require it we can do that, but the most important thing is the margin rates,” Fehr continued.

The competitive balance tax (aka the luxury tax) has some interesting modifications. The current four-year agreement had a $136 million threshold for the 2006 season. The Yankees as they have done for the three previous seasons exceeded the threshold, with a projected season ending payroll of around $201.5 million. The Yankees will pay a 40 percent premium on the $65.5 million exceeded the threshold, or $26.2 million.

The good news for the Yankees, their threshold has been increased, from $136 million to $148 million in 2007, $155 million in 2008, $162 million in 2009, $170 million in 2010 and $178 million in 2011. The bad news for the Yankees, a special gift for the Evil Empire – the only team who paid a 40 percent tax in 2006 will be forced to pay a 40 percent luxury tax for every dollar they spend over the threshold in each of the next five seasons.

Will that prevent the Yankees from spending less in the next five seasons – of course not. The Yankees play in the largest market, generate close to $200 million annually from their local broadcasting agreement with the YES Network (a broadcast entity the Yankees own 38 percent of) and are moving into a new Yankee Stadium in 2009 that will generate hundreds of millions of dollars in additional revenues for the Bronx Bombers. The Yankees last won the World Series in 2000. However, under the current MLB collective agreement the Yankees can afford to make mistakes (the two-years left on Carl Pavano’s four-year $39.5 million contract come to mind) and find an even more expensive replacement part. The Yankees have the financial resources to make mistakes and fix those mistakes.

The Toronto Blue Jays increased their team payroll from $51.5 million in 2005 to $76 million in 2006. The Jays signed A.J. Burnett to a five-year $55 million contract prior to the start of the 2006 season and the reliever B.J. Ryan to a five-year $47 million contract. If either player doesn’t deliver during the five-years of their multi-million dollar contracts, Blue Jays owner Ted Rogers isn’t likely to follow George Steinbrenner’s example of throwing money at a problem in hopes of fixing it. Rogers has the money, but not the revenues from the baseball side of his various businesses to justify spending like the Yankees do. The Blue Jays received $31 million from revenue sharing in 2006 – money they directly invested back into their on-field product.

The Pittsburgh Pirates will continue to enjoy the benefits of MLB’s revenue sharing program. Does that mean the Pirates are going to spend more on their team payroll?

"We have a good core of young players," Pirates owner Kevin McClatchy, told the Pittsburgh Post Gazette. "It's how we spend the extra money that's important. Hopefully, we'll use it wisely."

However, when asked if the new CBA with promised financial resources provided by MLB would allow the Pirates to begin negotiations with National League batting champion Freddy Sanchez on a long-term contract, McClatchy offered little hope to Pirates fans.

"This has no bearing on that," McClatchy said. "We haven't had those discussions yet."

What message is McClatchy sending to Pirates fans when the Pirates received $25 million from MLB’s “Robin Hood Affect” this year, along with more than $20 million in national TV money? The Pirates had an opening day payroll of $46,717,750 and received close to that amount from MLB. If you’re a Pirates fan the question you need to ask how committed is your team owner to building a contending franchise when he isn’t prepared to commit to reaching a long-term contract with one of his few marquee players?

"Everybody's doing all right," said McClatchy, who serves on MLB's labor relations committee but who was not part of the negotiating team. "We've gone from virtually no revenue sharing to now [more than] $300 million -- and that continues to grow. It will get better. What we have to work for is incremental change."

The Minnesota Twins are another team who has enjoyed the fruits of baseball’s revenue sharing plan. The Twins who won the American League Central regular season title in 2006 collected $22 million in revenue sharing and their national TV money (just north of $20 million). The Twins clearly understand you have to spend money to win and to make money. The Twins 2005 opening day payroll -- $56.1 million. The Twins 2006 opening day payroll -- $63.3 million.

"There's no question that the Twins organization has been a beneficiary of an industry that continues to grow and make significant incremental strides, both in terms of revenue as well as in terms of competitive balance and in the relationships between ownership and players," Twins President Dave St. Peter told The St Paul Pioneer Press.

"No question, the revenue sharing has been the crux of increased competitive balance of the game, and I think we expect clearly in the new ballpark a pretty significant change in what we receive in revenue sharing," St. Peter continued in the St. Paul Pioneer Press report. "It's always been our goal to zero that out, to not be a recipient .... We're a midsized market, not a small market and not a big market. If we do things right, maybe we're paying a little bit in the first few years of a ballpark."

St. Peter made it clear where the Twins beneficiaries of baseball’s revenue sharing are putting the tens of millions of dollars they’re receiving -- "I can assure you 100 percent of (the revenue-sharing money) was poured into baseball operations," he said. "It's all about funding a competitive baseball operation, which has been the edict sent out by the Pohlad family. I think the on-field results speak to that."

The Twins are moving forward with plans to build a new ballpark, a facility being built with private and public (taxpayer) dollars. Five years ago the Twins where a franchise being targeted for contraction, a remarkable turnaround for a franchise headed for the scrapheap.

"What makes us bullish on the future," St. Peter said, "is that with local revenues, that (revenue-sharing threshold) gap is going to tighten significantly as our new ballpark comes online in 2010."

If Selig’s vision of continued parity among MLB franchises, a vision of equality where franchises like the Yankees and the Red Sox are free to spend whatever they wish on their payrolls are going to compete with teams are at the other end of the spectrum the Marlins, Twins and the Pirates, its incumbent on the teams at the lower end to follow the business philopshy of the Twins, not the Marlins.

Major League Baseball has provided the financial mechanism for parity. Manage your business effectively, make the right personal decisions (how any business should be managed) and you’ll have an opportunity to produce a successful business that can generate a profit. The onus shouldn’t be on the big market teams to make sure the small market teams are competitive. The tools are being provided by Major League Baseball’s collective bargaining agreement. It’s up to Jeffrey Loria and Kevin McClatchy to build their teams following the examples being provided to them by the Minnesota Twins and the Toronto Blue Jays.

For Sports Business News this is Howard Bloom. Sources cited in this Insider Report: The Pittsburgh Post Gazette and the St. Paul Pioneer Press

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