Testimony of Allan H. (Bud) Selig

Commissioner of Baseball

Before the Committee on the Judiciary

United States House of Representatives

December 6, 2001

Mr. Chairman, my name is Allan H. Selig and I currently serve as the Commissioner of Baseball. Prior to being elected as Commissioner in 1998, I served as Chairman of the Major League Executive Council for six years. I appreciate the opportunity to testify before you today on matters that are of concern to this Committee, to those of us in Baseball and to our fans. I appear today for the particular purpose of addressing H.R. 3288, a bill that would partially remove Baseball’s antitrust exemption. The bill was apparently introduced as a response to Baseball’s recent decision to contract by two teams. In order to address the bill fully, it will be helpful for me first to speak more broadly about the state of our industry.

When I was elected Commissioner on July 9, 1998, I pledged to concentrate on two areas that were especially troubling to our clubs: competitive balance on the field and the economic stability of the clubs and Baseball as a whole. As part of the examination of these problems, I formed a Blue Ribbon Panel on Baseball Economics and named four independent members with the highest qualifications and reputations for integrity: Richard Levin, a brilliant economist and the president of Yale University; George Mitchell, former lawyer, judge and Senate majority leader, to whom in recent years the U. S. government has entrusted some of the nation’s most difficult and important problem-solving missions; Paul Volcker, also an accomplished economist and the former chairman of the Federal Reserve Board; and George Will, the highly respected author and Pulitzer Prize winning journalist who has written extensively on baseball.

For fifteen months, the Blue Ribbon Panel studied Baseball’s then current economic system. The Panel was given unfettered access to all of the books and records of Baseball and the individual clubs. It left no stone unturned. It had numerous meetings with groups of owners. Player union head Don Fehr and his associates appeared at one formal session and members of the Panel had other discussions with the union.

The report of these four panel members was released in July 2000 and was unequivocal. It concluded that Baseball’s economic system is broken. It concluded that Baseball has severe competitive balance problems that are threatening the game and that are caused by large and growing club revenue disparities and payroll disparities. The report demonstrated beyond dispute that there was a direct relationship between revenues and payrolls on the one hand and a club’s on-field performance on the other. It showed that only the top spending teams had any appreciable chance of reaching the World Series, much less winning it. The disparity had become so severe that teams that spent below the industry average on player payroll had not won a single postseason game in the five years studied in the report, 1995-1999, a total of 158 games. Let me repeat – for a five year period, and over 158 games, not a single postseason game was won by a team in the bottom half of the payrolls in the industry. Clearly, numerous teams and their fans were beginning spring training each year with little or no hope or faith that their teams could reach the postseason.

Although not the focus of the report, the report also showed extensive operating losses for the vast majority of Major League clubs between 1995 and 1999. Over those five years, only three teams – ten percent of the industry – the New York Yankees, the Colorado Rockies, and the Cleveland Indians, were profitable. During that five-year period, on operations alone, the industry lost in excess of $1 billion.

The situation has only gotten worse since that report. Our postseason continues to be dominated by high payroll clubs, and those payrolls continue to escalate. Although there has been an occasional exception involving a lower payroll team appearing – – but not advancing – – in the playoffs, the payroll and performance correlation is unmistakable and powerful. Only teams that are able and willing to spend enormous sums on player salaries have any chance to win the World Series. As the attached Chart 1 shows, through the 2001 playing season, there have now been 224 postseason games in the past seven-year period. Still, no team other than in the top one-quarter of payrolls has won a single World Series game. Due to the performance of the Oakland Athletics, teams in the lower half have now won five playoff games out of 224 games, representing a mere 2%, but none has advanced beyond the first round.

And Baseball’s financial losses and overall economic stability are even bleaker now than they were in the summer of 2000. Although revenues continue to grow, so do losses. As the attached Chart 2 shows, cumulative operating losses over the seven-year period have grown to almost $1.4 billion and now only two teams have been profitable on an operations basis over that period – Cleveland and the Yankees. Not surprisingly, the average payroll per club has grown from $33 million in 1995 to double that – – $66 million in 2001.

In fact, even respected outside observers are concerned about our “successful clubs.” For instance, just this week, the head of the Sports Group at Lehman Brothers was quoted in the Sports Business Journal as follows about the Cleveland Indians:

[T]he Indians are not a basket-case franchise. They’ve maximized

all their venue revenue. They’ve got a good, competitive team.

They’re not at the top of the payroll heap. And they’re still not

making money. Where does that leave most of the other clubs?

I met with all clubs last week in Chicago, and also a month ago, and we have spent many hours discussing these issues. I told the club owners last week that I would present to Congress the same numbers that our clubs have recently reviewed. Those numbers can be seen here on these charts and in the handouts distributed to the Committee. This is the first time that Major League Baseball has come to Congress with industry financial numbers as detailed as these, including individual club financial results.

Let me point out just a few of these numbers for you on the attached Chart 3 and urge that everyone take the time to study what we have presented. Although this year’s audits are not yet final, the consolidated loss for all thirty clubs in 2001 will be approximately $519 million. Twenty-five clubs lost money and five made money this year. The consolidated loss from just Baseball operations will be approximately $232 million. When the net interest expense is added to this number, the loss becomes nearly $345 million.

The interest I speak of relates predominantly to debt that is staggering in its proportions. The total industry debt is currently over $3 billion, as shown on Chart 4. If you add deferred compensation and future, guaranteed obligations to players, that number approaches $8 billion. Needless to say, those numbers are the highest in Baseball history, and, incredibly, they are still growing rapidly. Two of Baseball’s bankers spoke to the clubs at our meeting last week and underscored the severity of this situation.

I have read that the union and its economists will be skeptical about these numbers. Well, I am here to tell this Committee that the union has had these numbers, that these numbers have been audited repeatedly, and that the union has represented that it accepts the veracity of the numbers we have presented. The union has had club financial data since the mid-1980’s. Since 1985, the clubs have provided the union with audited financial statements from each club, uniform financial questionnaires prepared by each club and the industry’s consolidated financial statements. Since 1997, we have also provided the union with the results of the separate revenue sharing audits that are done of each club’s books each year by Pricewaterhouse Coopers. Finally, the union has the right under our collective bargaining agreement to conduct is own audit of any of the Clubs’ revenues. It has never done so. As part of my submission, I have provided three pages describing the financial information that has been presented to the union.

The idea that somehow what I have presented today is not an accurate picture of the industry’s economics is sheer nonsense. It is disappointing that union head Fehr is not here to verify my statements, but anyone who would state otherwise is just plain misinformed or is engaging in deliberate misstatement.

In examining Baseball’s competitive and financial issues, it has become clear that no single measure will solve the industry’s overall problems. The owners recognized that in January, 2000 when they concluded by resolution passed by a 30-0 vote that the industry did not currently have sufficient competitive balance and directed me to take action to correct the problem.

It has also become clear that there are clubs that generate so little in local revenue that they have no chance of achieving long-term competitive and financial stability, as shown on Chart 5. This conclusion holds true even under some of the most aggressive revenue sharing models which are being contemplated. Revenue sharing alone will not enable certain clubs to be viable over the long term. Furthermore, we have closely monitored the prospects of increasing local revenues in each of these markets through new facilities, lease enhancements, or other forms of public support. In certain cases, the public has spoken loud and clear that additional support is not a realistic option. As a result, despite significant efforts by the club owner, we believe certain clubs have no prospect of long-term competitiveness on the field or financial viability off the field. That is why Baseball has made the decision to contract by two teams, without having finally decided which teams they will be. Baseball has made this decision because the local revenue generated in these markets is simply insufficient to justify our continued investment in those markets. Baseball has seen significant increases in the national revenues generated for all clubs, but for a team to survive today it must also generate adequate local revenues. As you saw from the numbers, we have one team that receives 80% of its total revenues from Central Baseball and others that receive more than 50%. To generate sufficient local revenues, each club must have an acceptable home ballpark and sufficient market support. Jerry Bell, the president of the Minnesota Twins, will also testify today and, I understand, will emphasize the importance of having a satisfactory home ballpark. I am proud to say that 18 cities and Clubs have entered into partnerships of different dimensions over the past 15 years to build fan-friendly facilities that would generate sufficient revenues to allow their teams to compete. Others are under development.

Much has been written and said on the subject of contraction since I announced it a month ago today, and much is simply wrong. As an example, Baseball has been criticized for supposedly proceeding with contraction without consulting the players union. Nothing could be further from the truth. We first broached the subject of contraction with union leaders early this year and continued to discuss it with them throughout this year. We made it very plain to the union that contraction was a distinct possibility and that we would soon engage in bargaining over the effects of contraction, which is our responsibility to do under the labor laws, and which we have now begun. The union has clearly been kept informed that contraction was an option we were considering. Any confusion on the part of the players’ union is attributable solely to the fact that, throughout the year, no final decision on contraction had been made.

It has also been said that Baseball should not contract its troubled franchises but should relocate them. We have looked at the possibility of relocation and have not ruled it out in the near future. It is not, however, an immediate answer to the problems we are trying to solve. In weighing various relocation possibilities, it became clear to us that moving a club during this offseason, given our current industry economic environment, would merely be substituting one problem for another problem. Again, although we are very proud that no clubs have moved for thirty years, we may well find that relocation can become one part of our overall solution in the near future. But it is not the answer to any problems we are facing this year.

Members of this august body and the press have said that Baseball needs to share more local revenue. Governor Ventura has said many times that Baseball needs to get its house in order by having more revenue sharing and some form of salary restraint. Let me address both those points. First, Baseball shares much more revenue now than many of you and many of our fans seem to realize. This year, approximately $167 million in local revenue will be directly sent from the top clubs to the bottom revenue clubs. In addition, more than $700 million in national revenues are divided equally among the thirty teams. The $167 million is the highest level of local revenue sharing that Baseball has ever had and is four times more than we had only five years ago. But we fully agree – – repeat, fully agree – – that we should be sharing more local revenue. Our clubs are willing to do this. It must, however, be negotiated with the players union, which has resisted substantial increases in revenue sharing. Let me repeat, the owners want to share more revenues and the union has been unwilling to agree to a meaningful increase. Despite this resistance, we will persist in attempting to achieve greater local revenue sharing in our upcoming negotiations with the union.

Let me be candid, Mr. Chairman. Revenue sharing, relocation, even contraction by themselves will not solve all of the economic problems besetting Baseball. It is absolutely true that we also need some form of salary restraint. Football has it and has been able to achieve both financial stability and competitive balance in a system that allows Green Bay to compete on an equal playing field with a New York or a Chicago. The NBA has restraint to a lesser extent but certainly much more than Baseball has been able to achieve. I read regularly that what our sport needs is revenue sharing from the owners and salary restraint from the union. Again, the owners share revenue now and are prepared to do more, but the union has indicated no willingness to provide any salary restraint. While I am pragmatic enough to understand that we cannot achieve a hard salary cap without a prolonged strike, we did have a luxury tax under the last collective bargaining agreement, and the form of tax urged by the Blue Ribbon Panel should be acceptable to the union. Despite the union’s rhetoric, a luxury tax is not a salary cap or “cap-like”. This was clearly demonstrated by the luxury tax which existed for three years under our current collective bargaining agreement. That tax had no discernible impact on the growth in player salaries and did little or nothing to close the competitive balance gap. Again, I am disappointed that union leader Fehr is not here to offer his reasons for opposing contraction, opposing revenue sharing, opposing salary restraint, and, seemingly, offering nothing to solve the problems except the status quo.

Let me turn now to H. R. 3288, introduced by Congressman Conyers, that would partially repeal Baseball’s antitrust exemption. With all due respect, the bill would not be helpful to Baseball or its fans in any way. With the partial removal of the exemption contemplated by the bill, the franchise stability I have referred to and that Baseball has worked so long and hard to achieve could be severely undermined. Middle-of-the-night relocations that Baseball has in the past been able to prevent might occur in the future. If such a law had been in effect during the 1990s, several cities might very well have lost their teams. Those teams would more than likely have left smaller markets and joined larger markets that already have one or more clubs.

In addition, the bill as drafted creates doubt as to how far the removal of the exemption is meant to go. In 1998, we worked closely with the union and with Congress to craft a carefully worded change to our exemption in the area of labor relations. All parties at the time believed that the change created the right balance for the exemption. The wording of this bill could be read to shed doubt on the exemption’s applicability to such areas as Minor League players, the amateur draft, expansion and others. More important, it could upset the delicate legislative balance created in 1998. Again, the bill cannot be viewed as helpful in any way to the Major Leagues, the Minor Leagues or fans of either.

To those who say that the bill is a response to Baseball’s decision to contract, it must be understood that Baseball’s decision to contract is intended to advance the interests of long-term franchise stability. It is better that Baseball solve its franchise problems in a coordinated and carefully thought out way than that individual clubs take matters into their own hands, or that local officials pursuing parochial interests file frivolous lawsuits under the cover of federal and state antitrust laws. As I explained earlier, Baseball’s contraction is one very important piece to solving the economic puzzle. Congress should not react by exacerbating the problem.

Again, Mr. Chairman, I thank you for the opportunity to appear before you today and to address these important issues. I request that a copy of my remarks and my written submissions to you be made a part of the official record of this hearing.