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01 March 2006

CBA talk: A salary cap that can help the players

In light of the recent news about the NFL's troubled CBA negotiations and the changes to come in the next MLB CBA, I've decided to write a blurb about bringing a salary cap to baseball. Throughout the negotiations for the last few CBA iterations, the players union has been steadfastly against a cap, while the owners have pushed it. Nowadays, both sides feel confident that a deal will be done with little to no heartache for either. Many of the potentially divisive issues, such as drug testing, have already been negotiated. Bud Selig hasn't even brought up the cap as a potential bargaining chip.

Yes, a salary cap can help the players. Inconceivable! you say. You believe that players and owners are diametrically opposed mortal enemies, like a snake and a mongoose. To that end, I'd say you're right. However, sports economics has evolved to the point that a cap could actually provide a better payday for the union as a whole than the status quo, while providing the cost certainty that the league and its franchise owners want and the minimum payroll investment the "have" teams want of the "have-nots."

Before I begin to describe the solution, first it's important to understand how MLB stacks up against other sports. MLB is the one major sport left in North America without a salary cap of any kind, and its revenue sharing system is not nearly as comprehensive as the other three leagues' methods.
  • MLB: Estimated 2005 revenue - $4.5 billion. All national revenue (broadcasting, merchandise, internet) is equally shared. Roughly one-third of each team's local revenue is paid into a pool along with luxury taxes when applicable. The pool is then split into thirty equal pieces and distributed to each team. Each team gets their piece while also getting to keep its two-thirds share. Stadium-related expenses such as rent or debt-service can be deducted from each team's declarable local revenue, potentially making the pool contribution smaller.
  • NFL: Estimated 2005 revenue - $5.2 billion. All national revenue is equally shared - $3.2 billion, also called designated gross revenues. Ticket sales are split 60% home, 40% visitors. Each team gets to keep all suite and club seat revenue, ad revenue including naming rights, and ancillary stuff like mascot and cheerleader appearance fees. All of that covers the remaining $2 billion. If combined, the new revenue formula would be called total gross revenues.
  • NBA: Estimated 2004-05 revenue - $3 billion. All national and local revenue is pooled and shared with exceptions for roughly half of all suite and ad/naming rights revenue, which each team gets to keep for themselves. The term for this is basketball related income, or BRI.
  • NHL: Project 2005-06 revenue - $2.2 billion. All league revenue is shared equally.
Take a look the NFL's numbers. Split the national revenue among 32 teams, and each team gets $100 million before counting a single ticket, which is enough to cover an entire team's payroll and then some. Now looking at the salary requirements per league:
  • MLB: No real payroll floor, but minimum salary requirements mean that a team of rookies could be fielded with a payroll of $8 million. The 2005 payroll total for all 30 teams was $2.2 billion.
  • NFL: 65% of total gross revenue ($2.08 billion out of $3.2 billion)
  • NBA: 57% of BRI ($1.7 billion out of $3 billion)
  • NHL: 55% of revenue if revenue is $2.2 to 2.4 billion. 54% if less than $2.2 billion. 56% if more $2.4 to 2.7 billion. 57% if more than $2.7 billion.
You can see that there's more than one way to skin a cat, but in the end it all comes down to a magical range: 50-60% of each league's revenues is a generally agreeable industry-wide figure. The NFL's trouble stems from growing disparities in local revenue (sounds familiar, no?). Teams like the Redskins and Cowboys are the big market teams since their stadia have 300+ luxury suites and higher local revenue streams, which leaves teams like the Vikings, Bills, and Saints in the dust. The players have a beef because they feel they should be allowed a greater share of the total revenue pool (the players want 60%, the owners are willing give 56.2%). That would mean that each team would be required to spend $95 million on salary every year, which is a huge difference from the current $95 million cap, which would certainly be higher under a new system.

Contrast this with MLB's situation. $2.2 billion in total salary out of $4.5 billion in revenue equals only 48.7%. So the question here is: How the heck is MLB paying less in player salaries than the other three major sports? Consider the problems MLB supposedly faces:
  • MLBPA is considered the strongest union in pro sports
  • There is no salary cap
  • A high percentage of costly, long-term guaranteed contracts
  • The have and have-not disparity is discussed more often in baseball than in the other three sports (though there are plenty of legitimate reasons to complain about this)
Shouldn't MLBPA push for a greater share of the pie? Shouldn't low revenue teams push for a cap? Shouldn't high revenue teams push for a real salary floor and team reinvestment minimums?

Yes on all counts. The problem is trust with a bit of pride sprinkled in. MLBPA loves to trumpet the fact that there's no cap in baseball, even though they're getting shafted relative to their other union counterparts. They also don't trust the owners with a cap, since it would be one more step towards the owners colluding to keep salaries artificially low. The have-nots won't fully trust the haves unless there's a fairly rigid cap with penalties (luxury tax) and extensive revenue sharing. The haves resent having to pay out revenue sharing at all and don't trust the have-nots to properly reinvest in their teams (Exhibit A: Twins), so they want a payroll floor of sorts. Yet the collective owners don't really want a minimum like a payroll floor because then they'd probably have to pay the going rate - 55%.

From Selig and Bob DuPuy's recent comments, MLB isn't expecting a contentious negotiation period this time around. Neither is MLBPA's Donald Fehr. Perhaps they aren't interested in fighting and want to take a break for the next four years. This works until the economies inevitably change again, bringing some other issue to light that wasn't properly planned for last time. This occurs in every sport - a decade of peace followed by tough bargaining sessions and, unfortunately, work stoppages.

This is baseball's chance to set the right course for the next decade and beyond. It's no coincidence that MLB's revenues have been skyrocketing since they avoided a work stoppage in 2002. MLB and the owners have a good grasp on existing revenue streams. They have most of their new stadia in place. They've done a bang-up job on the internet side with MLB Advanced Media and the acquisition of tickets.com. International outreach continues to grow. Why not take advantage of the relative state of good relations and put these issues to bed?

Here's what each group should do:
  • MLB - Bring up the player percentage issue before the union makes it a bargaining item. By doing this, MLB can have the upper hand early in negotiations. Say they start at a 50% position and the union counters with 60%. Split the difference and the players get 55%, far better than they had previously (good for the players) yet lower than the industry standard and kept steady for the life of the CBA (good for the owners). The players' main concession would be to...
  • MLBPA - Agree to a NBA-style soft cap with a higher luxury tax trigger amount and salary exceptions to allow teams to re-sign their own free agents. The cap could be $95 million with a moratorium on penalties for the first two years to allow for bad contracts to be grandfathered in and either expired, renegotiated, or bought out. In bad salary years, a portion of all salaries (5-10%) would go into an escrow fund with amounts going to teams or back to the players at the end of each season. By doing this, they can ensure that each franchise's star players have a decent shot of staying with their teams, which is great for fans, teams, and players alike. I don't think a maximum player salary scale should be instituted, as is the case in the NBA, but teams can get first refusal rights or a form of restricted free agency for several years, perhaps in exchange for quicker unrestricted free agency or fewer arbitration years for the players. Of course, this isn't going to work to raise competitiveness unless the low revenue teams...
  • Have-nots - Have a real minimum payroll floor. That means that Tampa Bay can't spend only $29 million, one-seventh the amount the Yankees did on payroll in 2005. This is an arbitrary figure, but I'll throw it out there anyway: $45-50 million. That would force the Rays to go after frontline pitching help and prevent the Marlins from engaging in fire sales just to spite the city of Miami. If you're wondering if there's enough shared money to make this work, consider this: each team currently gets $35-40 million each year through national sources. Local broadcasting and ad revenue should be able to cover the rest. If necessary, the remaining amount needed to fund the salary floor can be raised if the high revenue teams...
  • Haves - Agree to a more expansive revenue sharing policy. Here I don't think it should be as comprehensive as in the NFL or NBA. Local revenue is too large a factor to simply do a straight redistribution. It would severely impact franchise values and prevent big market teams from being able to go over the cap when they wanted to, and frankly they should. Teams could start by sharing 50% of all local revenue (up from 33%) and 100% of national revenue (the current scheme). An escalator could be included that inches the shared percentage up to 60% when as the remaining teams without new stadia got stadium deals done and/or started their own regional sports networks (RSN's). Even with the greater revenue sharing, the Yankees, due to lower luxury tax payments, would come out $25-30 million ahead of the next highest revenue team, Boston, which should ease the concerns of George and his investors. The best part about it is that the first-to-last revenue disparity would go down some 50% (at least $80 million) while giving each team at least $120 million in total annual revenue, leveling out the playing field considerably (each low revenue team would get $10-20 million more each year).
The plan is definitely not perfect. There would be plenty of issues to work out, like the grandfathering scheme, luxury tax triggers, escrow percentages, and factors such as deferred compensation and the stadium expenses deduction.

The point of all of this is to work out an effective compromise deal that gives all parties a real stake in the eventual outcome. It comes with greater financial security for all and the promise of better competitive balance into the future. It - get this - gets everyone working as partners, not individually-oriented special interests. The A's 2006 payroll is estimated to be $61 million. As great as the roster can be, it's really good only for 2006 before raises kick in and free agency drives prices up. Wouldn't you feel better knowing that the A's had another $12-15 million to play with each year for next couple of years until the new ballpark is built? I know I would.

3 comments:

The Cactus Leaguer said...

Great post RM. I commend you for trying to boil down a subject that is so complex and nuanced that Russian novels could be written about it.

One aspect (there are many) that you didn't really touch on was the market for elite players versus the market for role players and how that effects salary caps. In pretty much every sport, the market for elite players is fixed, while the market for role players varies by sport. For example, in the NBA there is virtually no difference between your 10-12 roster spots and the better players in the NBDL or European leagues. In many cases the NBDL players are better but the NBA bench warmers have more potential upside.

Anyway, great stuff --- definitely worthy of cross-posting in other blogs as well.

Marine Layer said...

I think baseball has the makings of a system in place. Base each team's cap on their 40-man roster instead of the 25-man roster. Injury exceptions can be made as rosters are depleted and teams have to call up players not on the 40-man. There'd be some question as to how service time figures into this, but it could be managed.

The big issue is the value of players who have entered their seventh year. The NBA suffers from a lacking of proper salary scaling as too many players get max or near-max contracts yet clearly don't deserve it. I think the fact that MLB has much larger rosters will automatically create downward pressure on salaries. The existing arbitration system for 3-6 year players could be kept intact or replaced by a more rigid salary scale system.

Jeff said...

ML, you may have missed your true calling. That was absolutely brilliant. It seems a fair and balance approach to controlling costs and assuring owners a reasonable profit as well allocating the players their "fair share" of the revenue streams. Too bad "reasonableness" is not a commodity being sought after in the professional sports leagues. You would make a fortune.