The Upcoming CBA and the Battles Within It (Part 2) – Revenue Sharing

Baseball has to address the disincentives created by large scale transfers of revenue from successful clubs to less successful clubs. – John Henry, owner, Boston Red Sox

I’d like to see everybody competing, but we’re not a socialist state – George Steinbrenner, owner, New York Yankees

Teams have to be accountable to themselves for spending the money to become competitive – David Glass, owner, Kansas City Royals

The lower-revenue teams, even with revenue sharing, do not have enough money to compete – Jerry Reinsdorf, owner, Chicago White Sox

There are teams in major league baseball that receive more money from central baseball from the national television contract and revenue sharing than they spend on payrolls – Donald Fehr, executive director, MLB Players Association

So, the battle lines are being drawn—revenue sharing will be the key topic of negotiation (and contention) in the next round of collective bargaining.

As I mentioned in Part 1 of this multi-part series, as well as within the 2006 Annual, the real battle coming up in the next round of collective bargaining will be within the ownership ranks, not with the MLBPA. Revenue sharing will be the most contentious issue. (Some had thought that Contraction would be a key issue, but revenue sharing, not contraction, is the issue to watch.)

Will we see discourse on the level of the infamous Kohler meetings, where Selig had to hand notes back and forth between ownership groups? Certainly Bud Selig will be praying as much, and given the upbeat financial state of MLB these days, the chances are lower than that August in 1993, when revenue sharing was first brought forward to address competitive imbalance.

So, before I delve into the revenue sharing figures released by Stefan Fatsis and the Wall Street Journal (subscription required), which Andrew Zimbalist informed me are accurate, let’s go over quickly how the revenue sharing system is structured.

How the Revenue Sharing System Works

The following details the key section of the current Basic Agreement detailing revenue sharing:

(2) “Defined Gross Revenue” shall mean the aggregate operating revenues from baseball operations received, or to be received on an accrual basis, as reported by each Club on an annual basis in the Club’s FIQ. “Baseball Operations” shall mean all activities of a Club that generate revenue, except those wholly unrelated to the business of Major League Baseball. Baseball Operations shall include (by way of example, but not by way of limitation):
    (a) an activity that could be conducted by a non-Club entity but which is conducted by a Club because its affiliation or connection with Major League Baseball increases the activity’s appeal; and
    (b) an activity from which revenue or value is received as a result of a decision or agreement to forego what otherwise would be Defined Gross Revenue.

(3) “Central Revenue” shall mean all of the centrally-generated operating revenues of the Major League Clubs that are administered by the Office of the Commissioner or central baseball including, but not limited to, revenues from national and international broadcasting agreements (television, cable, radio and Internet), Major League Baseball Properties, Inc., Baseball Television, Inc., Major League Baseball Enterprises, Major League Baseball Advanced Media, Inc., the Copyright Arbitration Royalty Panel, superstation agreements between the Commissioner’s Office and the Clubs whose games are transmitted on a distant signal (“Superstation Agreements”), the All-Star Game and national marketing and licensing.

(4) “Local Revenue” shall mean a Club’s Defined Gross Revenue less its share of Central Revenue.

(5) “Actual Stadium Expenses” shall mean the “Stadium Operations Expenses” of each Club, as reported on an annual basis in the Club’s FIQ.

(6) “Net Local Revenue” shall mean a Club’s Local Revenue less its Actual Stadium Expenses.

(7) The “Base Plan” shall be a 34% straight pool plan. The amount of net payment or net receipt under the Base Plan for each Major League Club shall be determined as follows: Each Club contributes 34% of its Net Local Revenue to a putative pool; that pool is then divided equally among all Clubs, with the difference between each Club’s payment into the putative pool and its receipt there from producing the net payment or net receipt for that Club.

(8) Those Clubs that receive net receipts in a given revenue sharing year under the Base Plan shall be referred to for that year as “Payee Clubs.” Those Clubs that make net payments in a given revenue sharing year under the Base Plan shall be referred to for that year as “Payor Clubs.”

(9) The revenue sharing plan shall also have a “Central Fund Component” under which a portion of Major League Central Fund money will be reallocated from Payor Clubs to Payee Clubs. The amount of net payment or net receipt under the Central Fund Component for each Club shall be determined as follows:

    (a) Net Transfer Value. At 100% implementation, the net transfer value of the Central Fund Component, in each revenue sharing year, shall be 41.066% of the net transfer value of the
    Base Plan in that revenue sharing year. “Net transfer value” shall mean the sum of the amounts transferred from Payor Clubs to Payee Clubs.
    (b) Contributors and Recipients. During each revenue sharing year, Major League Central Fund money shall be reallocated from Clubs that are Payor Clubs for that revenue sharing year
    (“Contributors”). Distributions under the Central Fund Component for each revenue sharing year shall be made only to Clubs that:

      (i) are Payee Clubs for that revenue sharing year, and
      (ii) have a mean Net Local Revenue for the preceding three revenue sharing years that is below the industry’s mean

That covers most everything, but if you want the cribs version, zero in on (7): Each Club contributes 34% of its Net Local Revenue to a putative pool; that pool is then divided equally among all Clubs, with the difference between each Club’s payment into the putative pool and its receipt there from producing the net payment or net receipt for that Club.

The 34% of Net Local Revenue is a jump from the last Basic agreement, in which the figure was 20%. It was a reach last time, and here’s the thing … the MLB brass, and many of the smaller revenue making clubs wish to see and increase from 34% of Net Local Revenue. Paul Godfrey, the president of the Blue Jays has suggested 50%.

Needless to say, there has become sharp divisions over how the revenue sharing system is structured. For example, read the following excerpt from the current basic agreement, which outlines the intent of how revenue sharing dollars should be used (bolding mine):

(5) Other Undertakings

(a) A principal objective of the revenue sharing plan is to promote the growth of the Game and the industry on an individual Club and on an aggregate basis. Accordingly, each Club shall use its revenue sharing receipts (from the Base Plan, the Central Fund Component and the Commissioner’s Discretionary Fund) in an effort to improve its performance on the field. The Commissioner shall enforce this obligation by requiring, among other things, each Payee Club, no later than April 1, to report on the performance-related uses to which it put its revenue sharing receipts in the preceding revenue sharing year. Consistent with his authority under the Major League Constitution, the Commissioner may impose penalties on any Club that violates this obligation.

Clearly, not all clubs are reinvesting back in player payroll, and Commissioner Selig has yet to impose penalties on those clubs. Some, it seems, enjoy welfare, but more on that in a bit.

Who Paid and Who Received?

The following is a breakdown, based on the plan outlined above for those that are payors 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
                     (millions) 
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.

One club, however, stands out head and shoulders above the rest of the clubs for taking advantage of the revenue sharing system: the Florida Marlins.

By now, many of you know that the Marlins drastically cut payroll last season (by $45,410,334, a 75.17% decrease from 2005) to $14,998,500. When you factor in revenue sharing, the Marlins actually have a surplus of $16,001,500. In an email conversation with an ESPN senior writer and television analyst, I mentioned that this was a case of baseball welfare, with the Marlins pocketing the windfall. His reply was that, “The rationalization on the Marlins, and this is true to a certain extent, is that they lost a lot of money the previous three years trying to win. And if it wasn’t going to lead to a stadium, then they needed to do what they needed to do to recoup.”

My response was that this may be true to an extent, but that it certainly didn’t fall within the spirit of that pesky section within the revenue sharing provisions on applying the monies from revenue sharing to improve on-the-field performance. Somehow I doubt that Steinbrenner, Henry, and the other 11 clubs that were payors into the system would view it as such. No one was holding a gun to Loria’s head to overspend, and after all, he did get a World Series for his efforts. What’s to keep other clubs from using this, “I paid for a World Series, so now I’m going to pocket revenue sharing dollars to make up for my investments back then” precedent in the future?

How Will This Impact Negotiations?

As I mentioned at the beginning of this article, the battle lines are being drawn, with revenue sharing the key topic of negotiation. Those clubs that are paying the most into the system are going to be looking for relief, or at the very least, making sure that there is more accountability into where the monies are going … into player payroll, or possibly into an owner’s pocket. Lower revenue making clubs will be looking for an increase in the percentage of net local revenue, and closing of the loophole where stadium construction costs remove a portion of revenue sharing obligation.

What seems key in this discussion is that MLB’s financial outlook is better for all the participants than in years prior. Nothing seems so insurmountable that a strike or lockout would occur. As Bob DuPuy said in the Wall Street Journal article this past week, “Clubs accept the structure that we’re in. It’s a matter of refining the structure rather than an all-out assault on the structure.”

References & Resources
Playing Hardball by Stefan Fatsis – The Wall Street Journal (subscription required)

USA Today’s Salaries Database

2002-2006 Collective Bargaining Agreement

1997-2001 Collective Bargaining Agreement

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