Blue Ribbon Silliness, Part 2

Last month's column reviewed the data released by Major League Baseball's "Blue Ribbon Panel on Baseball Economics" to support its conclusion that MLB needs greater competitive balance. This month, I'll look at the panel's proposed solutions.

The panel's recommendations reflect its membership, which was skewed heavily toward middle-market teams. It proposed greater sharing of local revenues, a luxury tax on high payrolls and incentives to pressure the low-payroll clubs to spend more on players.

Most importantly, the panel did not propose a salary cap. This omission effectively takes this controversial issue off the bargaining table before next year's labor negotiations even begin. Fans looking forward to a 2002 season can breathe a little easier.

Not too much easier, though. Instead of a firm salary cap, the panel called for a "competitive balance tax" modeled on, but tougher than, the luxury tax which existed from 1997-99. Clubs would pay a 50% tax on the amount of their payroll over $84 million -- a formula strikingly like the one the players rejected five years ago. They won't go for it now, either, especially since the $84 million threshold would remain constant for several years, with no adjustment as MLB's revenues increase.

Unfortunately, the panel doesn't seem to realize that another of its recommendations could improve competitive balance without provoking another strike. The solution is greater revenue sharing.

To an owner, baseball players are investments. Teams which sign players to expensive contracts do so because they expect the signing to produce at least that much additional revenue, in the form of increased attendance, higher ticket prices, and more lucrative local media contracts. Revenue sharing and a luxury tax affect opposite sides of this equation, but have the same effect.

Assume that Team X expects that signing Player Y to a $5 million contract will produce $6 million in additional revenue. Under a luxury tax system, the team might have to pay another $2 million in tax if it signs Player Y, in which case it's better off without him. With greater revenue sharing, Player Y costs only $5 million, but $2 million of the expected extra revenue is diverted to the visiting team. Either way, Team X is left in exactly the same position.

The panel proposes that teams share as much as 50% of their local revenues. If adopted, revenue sharing on this scale would reduce both the incentive and the money available for large-market teams to increase their payroll.

Neither revenue sharing nor the luxury tax solves the "Montreal problem": small-market owners who simply pocket the money they're given without reinvesting it in their teams. The blue ribbon panel would reduce revenue-sharing payments to clubs with payrolls below $40 million, thereby encouraging them to spend more on players. But such encouragement would only work if revenue-sharing payments are larger than they're likely to be: offering the Expos $10 million to increase their payroll by $20 million will have no effect.

Moreover, requiring clubs to maintain a $40 million payroll every season will actually hurt the better-managed clubs. Several years ago, Cleveland showed that a perennial mediocrity can become a long-term contender by trading all of its high-salaried veterans for prospects, then locking up the young players with long-term contracts. A team following this strategy will have a very low payroll for a year or two before the young players mature and it fills the gaps with free agents, but will lose revenue sharing money during the rebuilding period. By contrast, clubs like the Phillies and Brewers, who tread water with moderate payrolls every year, would receive their full share. .

Bob Costas has identified a way around this problem. Costas would tie revenue sharing to a club's five-year average payroll, thereby encouraging teams to adopt the Indians' model, and would penalize clubs which refuse to spend by fining them the full amount by which their payroll falls below the minimum. Even Carl Pohlad of the Twins would rather pay his players than his fellow owners.

The Blue Ribbon Panel would also overhaul the amateur draft. Some of the changes -- allowing clubs to trade draft picks, depriving playoff clubs of their first-round pick -- seek to improve competitive balance, but the key proposals seek to save the owners money by reducing amateurs' leverage. Foreign players would be subject to the draft, and draftees would no longer be allowed to re-enter the draft each year until a selecting club met their terms. The MLBPA is unlikely to object, since it doesn't represent draftees and most of the savings would probably be passed on to its membership.

Finally, the panel advocates "strategic franchise relocations" to better markets, suggesting that struggling teams might consider moving "to a very large market already occupied by one or more high-revenue clubs." This definition applies to Washington, D.C., which has been lobbying for a team -- but also to northern New Jersey, an even better market which is currently considered part of the Mets' and Yankees' territory. If revenue sharing and a luxury tax fail to slow George Steinbrenner, perhaps a new team in the Meadowlands could do the trick.

Copyright © 2000 Doug Pappas. All rights reserved.
Originally published in the September 2000 issue of Boston Baseball.

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