Summer 2000: Report on the Blue Ribbon Panel Report

In July, amidst much fanfare, MLB published "The Report of the Independent Members of the Commissioner's Blue Ribbon Panel on Baseball Economics." A copy of the full report, in Adobe Acrobat .pdf format, is available online at http://www.majorleaguebaseball.com/u/baseball/mlbcom/blueribbon.pdf.

The first paragraph declares that the Panel "represent[s] the interests of baseball fans." Twelve of our 16 self-appointed protectors own or operate major league teams. The four "independent" members are Yale president Richard C. Levin, who drafted the owners' 1989 salary cap proposal; former Federal Reserve chairman Paul Volcker, who represented the owners on the last blue-ribbon economic panel, in 1992; former Senator George Mitchell, often mentioned as a possible Commissioner; and columnist George Will, who in a remarkable conflict of interest serves on the boards of both the Orioles and the Padres.

The report supports its conclusions with three types of data from the 1995-99 seasons: revenues, player payrolls, and "competitiveness," measured by comparing payrolls to on-field performance. All of this data is taken directly from figures supplied by the clubs and MLB; the panel conducted no independent investigation of its own. As a result, we're treated to straight-faced assertions that over the past five years, the Braves lost $7 million despite their on-field success, new stadium and national cable exposure, and that Rupert Murdoch paid over $300 million for a Dodger club that lost $77 million over this same span.

In fact, MLB claims that from 1995 through 1999, only three teams -- the Yankees, Indians and Rockies -- made money, while the industry as a whole lost over $1 billion, or $35 million per team. By contrast, Financial World and Forbes estimate that MLB collectively earned $400 million over this period.

Indeed, MLB's own figures show that from 1996 to 1999, gross revenues grew by more than $1 billion, while player salaries rose by only $550 million....yet MLB claims that losses increased over this period. Where did the other $450 million go?

The panel then presents payroll and "competitiveness" charts to illustrate its concerns about "chronic competitive imbalance." The charts show that as a group, teams with higher payrolls have better records than teams with lower payrolls. This is news? So long as superior players earn more than inferior players, high-payroll teams will collectively have better players than low-payroll teams.

The charts also err in using September 1 rosters for to calculate team payrolls. Since this method allocates a player's entire salary to the club he plays for on September 1, and since contending teams tend to acquire high-salaried veterans from rebuilding clubs in midseason, this method artificially inflates the difference in salaries. For example, the Yankees will be charged with all of Jose Canseco's salary despite paying only a third of it, while the Orioles will have paid well over $10 million in salaries to players traded before the arbitrary September 1 cutoff. A more accurate method -- in fact, the method used to measure payrolls for luxury tax purposes -- would compare teams' actual payrolls, pro-rated for players traded in midseason.

By focusing only on the seasons from 1995 to 1999, the panel has made the link between payroll and performance look stronger than it actually is. In 1994, one year before the selected period, the Montreal Expos had the majors' best record and second-lowest payroll. This season, at press time Toronto, Oakland and San Francisco are contending with the lowest payrolls in their respective divisions, while the Chicago White Sox have the AL's best record but third lowest payroll. Clearly, there's some link between payroll and performance, but it's not as strong as the panel suggests.

More importantly, the charts beg the real question, which is how easily a team can move from one category to the other. Let's look back to 1991. That year, the Minnesota Twins upset Oakland, the league's highest-paid team, to win their second World Series in five years. In the National League, Pittsburgh won its second of three consecutive divisional titles. The Pirates lost the LCS to the surprising Braves, who had posted the league's worst record in each of the three previous seasons.

That right: within the past decade the Twins won the World Series, Oakland had the majors' highest payroll, and the Pirates won three division titles in a row. As the doomsayers would have predicted, the three lowest-payroll clubs finished with the three worst records, a combined 189-297 -- but within a few years those hapless losers, the Orioles, Indians and Astros, were among the game's elite.

In fact, since 1991 24 of the 30 major league teams have made the playoffs. A 25th, Montreal, had the majors' best record in 1994. The other stragglers include Tampa Bay, a third-year expansion team; Anaheim and Detroit, mismanaged large-market clubs; Kansas City, which had earlier won seven division titles in 11 years -- and Commissioner Selig's Milwaukee Brewers.

The panel proposes a variety of solutions to remedy the perceived competitive imbalance. The most important of these recommendations call for 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 removes this controversial issue off the bargaining table even before the next labor negotiations 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 as 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 would improve competitive balance without provoking another strike. This superior 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 analysis, 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 the current system, it will make him an offer. With a luxury tax in place, if the team's payroll is high enough that signing Player Y would cost another $2 million in tax, it won't sign him. With greater revenue sharing, the cost of signing Player Y would remain at $5 million, but if $2 million of the expected extra revenue is diverted to the visiting teams, Team X is left in exactly the same position. If MLB implemented the panel's proposal to share as much as 50% of local revenues, large-market teams would have less incentive, and less money, 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 "encourage" them to spend more on players by reducing revenue-sharing payments to clubs with payrolls below $40 million. But this approach can only work if the amount of money to be withheld is larger than it's likely to be: offering the Twins or Expos $5 million to increase their payroll by $20 million will have no effect. Only a firm minimum payroll can do that.

But this minimum can't be simplistically based on annual payroll alone, because requiring clubs to maintain a $40 million payroll every season will actually hurt the better-managed clubs. Several years ago, Cleveland showed how a mediocre team can become a perennial 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, but will lose revenue sharing money during the rebuilding period. By contrast, clubs like the Phillies and Brewers, who regularly spend just enough to finish 78-84, would receive their full share. .

In Fair Ball, Bob Costas 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.

The Blue Ribbon Panel also proposes to 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 changes would save all 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 fight hard against these proposals, since it doesn't represent draftees and most of the savings would probably be passed on to its membership.

Several minor proposals are either pointless or downright bad ideas. The worst suggestion is an annual "competitive balance draft," under which the eight clubs with the worst records could draft players not on the 40-man roster of the eight playoff teams. Apart from the silliness of rewarding a club for finishing 23rd rather than 22nd, the players not on a 40-man roster typically include a team's very best young prospects, the loss of whom would be far more severe than the loss of the 39th or 40th man on the major league roster. The panel's proposal to deprive all playoff clubs of their first-round pick in the following year's amateur draft also seems unnecessarily punitive. The panel also advocates eliminating the compensation pick awarded clubs who lose players to free agency, noting that many players on the verge of free agency are traded in midseason to clubs with better records, who then get the draft pick. But by lowering the trade value of such players, the plan would reduce the value the trading club receives in return, leaving it no better off.

Finally, the panel advocates "strategic franchise relocations" to better markets. It suggests 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 is lobbying for a team -- but also to northern New Jersey, an even better market which is currently considered part of the New York territory. If revenue sharing fails 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 Summer 2000 issue of Outside the Lines, the SABR Business of Baseball Committee newsletter.