As the National Basketball Association and its players grapple with the grim realities of a prolonged lockout and the cancellation of regular season games, Major League Baseball is quietly negotiating another collective bargaining agreement well ahead of the Dec. 11, 2011 expiration date.
Instead of the public displays of frustration and acrimony that normally personify the collective bargaining process in sports, Michael Weiner and Rob Manfred are steadily making progress towards a new agreement without any fanfare or negativity.
The surprisingly secretive, yet productive negotiations are in stark contrast to what has occurred with the National Football League this past summer and currently with the National Basketball Association. It’s quite possible that Major League Baseball could have a new collective bargaining agreement by the conclusion of the World Series.
Michael Weiner’s first negotiation as Executive Director could conceivably be Bud Selig’s final collective bargaining agreement as commissioner since his contract expires at the end of the 2012 season. With retirement from baseball imminent and a possible career change on the horizon, Selig knows that before he considers writing a book or even teaching history at the University of Wisconsin, he needs to leave the game of baseball in good hands. A successfully negotiated agreement that adequately addresses current dilemmas and gives both parties a sense of ownership is the desired result.
While Selig’s commissionership has been marked by numerous astounding accomplishments and advancements that have positively affected the game, it is the monumental controversies and blatant ignorance of the steroids epidemic that will eternally plague his tenure as commissioner. Therefore, it is imperative for Selig to oversee a new agreement that is not only equitable, but also allows the game to flourish in the years to come.
As Weiner and Manfred address wide ranging issues from pensions and compensation to performance enhancing substances and even alcohol-related incidents, there are five unique topics of interest that will prominently occupy significant time and interest:
1. Revenue Sharing
Since its inception in the 1996-2000 basic agreement, revenue sharing has been a controversial topic amongst the owners.
Unfortunately, the phrase “revenue sharing” has always had a negative connotation in baseball due to the continued mismanagement of the Florida Marlins and Pittsburgh Pirates.
Once the leaked financial statements of six major league ball clubs became public last summer, the constant scrutiny of the Marlins and Pirates had only intensified and several legitimate questions had risen to the surface. The Pirates’ income statements for 2007 and 2008 not only showed a robust average net income of $14,708,140, but also an average revenue sharing receipt of $34,674,482. In each of the aforementioned seasons, the Pirates had lost at least 94 ball games and finished last in the National League Central division. The Pirates have not had a winning season since 1992 and have finished in last place in their division nine times since 1995.
In the case of the Marlins, they posted a modest net income of $3.9 million in 2009, but an eye-popping $29.4 million in 2008. The Marlins’ average major league compensation over the two-year period was $36,370,500. Egregious acts have almost become synonymous with the Marlins.
The Marlins have had seasons in which their team payroll was significantly less than what they received in revenue sharing. In 2006 alone, the Marlins had 16 ball players that were making $327,000 with a team payroll around $15 million on top of an estimated $33.4 million in revenue sharing. In total, the average salary for a Marlins’ ball player in 2006 was $594,722. The miserly actions of David Samson and Jeffrey Loria have caught the attention of Michael Weiner as well as the ire of local politicians and Marlins’ fans.
According to the 2007-2011 Basic Agreement, the revenue sharing plan is supposed to help individual ball clubs improve the quality of the on-field product. Surprisingly, the language used in this section leads the reader to believe that each payee ball club must report what the revenue sharing receipts were used for by April 1 of the following year. If the commissioner is not happy with how the revenue sharing receipts are being used, he could impose a penalty on the offending ball club.
From all accounts, not a single penalty has been assessed nor has one become public knowledge. We still don’t honestly know if Commissioner Selig has indeed chastised a ball club and imposed a penalty on a guilty party. However, Michael Weiner has admonished the Marlins about their responsibilities in fulfilling the basic requirements of the revenue sharing plan. In January 2010, a joint statement was released by the Marlins, Major League Baseball and the Major League Baseball Players Association regarding the Marlins’ questionable compliance with revenue sharing.
2. Competitive Balance Tax
The competitive balance tax has been sarcastically known as the “Yankee Tax” thanks in part to the endless array of exorbitant contracts and yearly payrolls that rival the gross domestic product of most third world countries. The competitive balance tax has become the owners’ response to the rightful reluctance of the players to embrace a salary cap structure within baseball.
This past season, the average payroll on Opening Day was $92,991,719.12 ball clubs had payrolls that exceeded $100 million while another six ball clubs had spent at least $85 million, but less than $93 million. For the fourth consecutive year, the average salary for a ball player on Opening Day exceeded $3 million ($3,305,393) while minimum wage was $414,000. Major league salaries have come a long way since the days where the minimum salary was $6,000 and the average was $19,000 in 1967.
The 2007-2011 basic agreement made minor adjustments to the interest rate rules.
For instance, a first time offender under the current collective bargaining agreement is assessed with a 22.50 percent tax while a second time offender is penalized with a 30.00 percent tax. Quite similar to the previous collective bargaining agreement, third-time offenders are taxed at 40.00 percent. The thresholds have also increased as well. Beginning in 2007, the competitive balance tax threshold was $148,000,000 and the following two years saw an annual increase of $7 million. In the final two years of the current collective bargaining agreement, the threshold was increased by $8 million per year. At the present moment, the 2011 threshold under the competitive balance tax is $178,000,000.
Between the 2003-2010 seasons, there have only been four ball clubs that have exceeded the competitive balance tax threshold: Yankees, Red Sox, Angels and Tigers. Surprisingly, the National League has complied with the basic rules of the competitive balance tax.
The Yankees have overwhelmingly exceeded the tax thresholds annually during this period and are usually notified by the Commissioner’s Office by Dec. 12. Payment for competitive balance tax penalties is due by Jan. 31 of the next calendar year. Since 2003, the Yankees have paid approximately $192 million in competitive balance tax penalties, but they are not the only multiple time offender. The Red Sox have violated the thresholds on five different occasions (2004-2007, 2010) and have paid $15,349,779 in penalties. In total, the competitive balance tax has generated an estimated $209.7 million for Major League Baseball.
Unlike the revenue sharing plan, the competitive balance tax proceeds are not distributed to major league ball clubs in dire need of financial assistance due to inequities in local markets. According to Article XXIII (H) (1) (2) (3) of the 2007-2011 basic agreement, the first $2.5 million of the proceeds is held in reserve. 75 percent of the remaining proceeds are used to fund benefits for the players and the final 25 percent is used for the Industry Growth Fund.
Typically, the casual baseball fan is not familiar with the Industry Growth Fund and its relevance to the competitive balance tax. In Article XXV of the 2007-2011 basic agreement, the Industry Growth Fund is thoroughly explained and offers clarity to anyone who is confused by the concept. In summary, the Industry Growth Fund’s primary purpose is to promote the game of baseball both nationally and internationally. At the heart of the Industry Growth Fund is fan interest, growth opportunities and increasing the popularity of America’s national pastime. Through player tours, usage of media technology, community service initiatives and various projects, funding from the competitive balance tax is used to support these noteworthy activities that help Major League Baseball serve as an ambassador to the world.
3. First-Year Player Draft
Major League Baseball’s three day, reverse order draft covers 50 rounds and over 1,500 ball players. Unfortunately, maintaining enthusiasm is all but difficult to achieve. However, the dynamic ball players that have been the focal points of the past three drafts have significantly helped bring baseball’s draft to the forefront of conversations and also raised legitimate questions about how the draft can be improved going forward. Most of the improvements have focused on two key topics: an international draft and slotting fees.
Under Rule Four of the Major League Rules (“First-Year Player Draft”), only residents of the United States and Canada are eligible for baseball’s draft.
According to MLR 4 (a), the “United States” is loosely interpreted as all 50 states, Washington, D.C., Puerto Rico, any other commonwealth, territory or possession of the United States. In other words, fertile countries for baseball such as Japan, Venezuela, and the Dominican Republic are not eligible.
International ball players and their eligibility are outlined in the Major League Rules as well. According to MLR 3 (B) (i) (ii), ball players who do not meet the basic draft eligibility criteria (residency, schooling, etc.), must be at least 17 years old at the time of signing or can be 16 as long as they turn 17 by the end of the season in which they signed or Sept. 1 of the same season. Birth certificates and appropriate documentation are always required and will be part of the filing process for a ball player’s first contract.
One of the common themes that have occurred throughout the past three First-Year Player Drafts has been the immensely lucrative signing bonuses and contracts given to ball players who have never played a single day as a professional baseball player.
The phenomena began with Stephen Strasburg’s four-year, $15.1 million contract with the Washington Nationals. $7.5 million of the contract was Strasburg’s signing bonus. By 2010, the Nationals once again gave another baseball prodigy, Bryce Harper, an overtly generous signing bonus of $6.25 million.
Out of the 32 picks in the first round of the 2010 draft, 17 of the picks were paid above the recommended slot money by Major League Baseball. In 2011, 31 of the 33 picks in the first round of the draft received signing bonuses that exceeded $1 million.
A topic of intense conversation immediately after the signing deadline this past August was the bonus expenditures. Jim Callis of Baseball America produced two analyses that initially appeared to be fictitious in nature.
The first document was the bonus expenditures from the 2011 draft. Besides seeing the Pittsburgh Pirates spend over $17 million on draft bonuses, the grand total throughout baseball was estimated at $228 million. However, the most startling statistics came in the second analysis that chronicled the bonus expenditures during the 2007-2011 basic agreement. In total, Major League Baseball ball clubs committed over $953 million to draft bonuses. Ball clubs such as the Pirates, Nationals and Royals ranked one through three in terms of the ball clubs that have committed the most money to bonus expenditures since 2007.
Numbers like these confirm the overwhelming evidence that Major League Baseball should not only adopt a hard-slotting system, but attempt to implement an international draft.
4. Team Debt
The financial dramas of the Cubs, Rangers and Dodgers have led to frequent visits to United States Bankruptcy Court. Even the Mets have tackled an endless array of controversies involving dilemmas with loans, inabilities to secure minority investors and overall ill will from a devout fan base as a result of their business relationship with Bernie Madoff. To make matters worse for the Mets, former malcontent Bobby Bonilla returned to the ball club’s payroll after a decade plus hiatus and will stay there for 25 years at an annual salary of $1,193,248.20. By deferring payment of $5.9 million that was owed to him in 2000, Bonilla has earned eight percent interest on his money and an annual paycheck from the Mets until 2035.
Baseball fans have become familiar with Chapter 11 bankruptcy filings and seeing a robust roster of current and former ball players listed as creditors with unsecured claims in the millions. It has also become apparent to most observers that Major League Baseball’s debt service rule isn’t being enforced in the manner in which it was intended.
This past June, multiple media outlets reported that nine ball clubs were in violation of the debt service rules. Besides the obvious culprits, the Mets and the Dodgers, ball clubs such as the Orioles, Cubs, Tigers, Marlins, Phillies, Rangers and Nationals were not in compliance with the elementary principle of 10 times EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). This business practice is intended to limit a ball club’s debt obligations. The debt service rule originally surfaced as a result of the mounting debt that ball clubs were consistently carrying beginning in the early 1990’s. Club debt was hovering around $500 million at this point and it eventually made its way up to $3 billion by the start of the 21st century.
In the 2007-2011 basic agreement, Attachment 22, Section Four addresses the penalties for non-compliance of the debt service rule. According to the Remedial Measures for Non-Compliance, there are 16 penalties that the commissioner can impose on a ball club that is not in compliance with the debt service rule. Some examples range from prohibiting a ball club from incurring additional debt and making capital expenditures to ball clubs being denied the right to be represented at league meetings or even committees.
5. Expanded Playoffs and Realignment
Whether it’s a sudden death game or a best of three series between wild card winners, expanded playoffs are coming to Major League Baseball. The key question now is will it begin in 2012 or 2013? Even though there seems to be genuine excitement about the possibility of 10 ball clubs qualifying for the postseason, there are still issues and concerns that need to be addressed throughout the course of the negotiations.
One rumor that has consistently circulated involves the Houston Astros moving to the American League to balance off both leagues at 15 ball clubs a piece. Another rumor involves radical divisional realignment.
However, one issue that no one seems to be talking about is how postseason revenues would be distributed to ball players. Currently, postseason revenues are based off of the gate receipts from the World Series, first four games of each League Championship Series and the first three games of each Division Series. After the Commissioner’s Office gets 15 percent from all of the World Series games and an annually approved percentage from the League Championship Series games, the players’ revenues are identified and distributed.
A singular pool is created for the players based off of revenues from the World Series, both League Championship Series and each of the Division Series. The contributions of revenue to the players’ pool is defined by 60 percent of total gate receipts for the first four games of the World Series, first four games of each League Championship Series and from the first three games of each Division Series. The players’ pool is then divided amongst all of the ball clubs that had qualified for the postseason plus the second place ball clubs that failed to reach the postseason. While the winner of the World Series gets 36 percent of the revenues in the pool, one percent is still given to each of the second place ball clubs whose seasons just fell short of a postseason appearance.
Besides the restructuring of the players’ pool, a third of all of the ball clubs in baseball would qualify for the postseason. It can be viewed as an extraordinary opportunity for growth, but also as a mechanism for diminishing the overall quality of play in the postseason for the sake of a few extra playoff games. Participation in postseason competition should be exclusive, not inclusive.
Wayne McDonnell, Jr. is a Clinical Associate Professor of Sports Management, NYU School of Continuing and Professional Studies (NYU-SCPS) Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management Professor McDonnell is a highly sought-after commentator on all things sports, particularly baseball. He regularly appears on the MLB Network program Prime 9; coaches athletes as a private hitting and pitching instructor; and shares timely insights via the Twitter handle @wmcdonn25.
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