MLB’s Collective Bargaining Agreement (CBA)

Baseball’s CBA, in brief Reached on Aug. 30, 2002 –first settlement in 30 years without a work stoppage Lasts four years; ends in Dec –New agreement ( ) retains its key features. Supposed to promote competitive balance –increased revenue sharing –luxury tax (old one existed only in )

Background General climate of ill will and conflict –8 work stoppages since 1972 (5 strikes, 3 lockouts) –Owners’ collusion against free agents in intensified union’s distrust of owners –Last work stoppage ( ) lasted 232 days, forced cancellation of 938 regular-season games and 1994 postseason --> alienated fans: average attendance fell 21% from 1994 to 1995

Background (cont’d) : industry revenues doubled, attendance gradually recovered (to 95% of pre-strike level) –MLB rode the economic boom, stadium- construction boom; player heroics –But, tell it to the owners… Continuing complaints of poverty (MLB’s 2000 report: 27 of 30 teams lost money over 5-year span) Worsening competitive imbalance

Background (cont’d) Sept. 11, 2001; economic slump... Nov. 2001: Commissioner Bud Selig says owners plan to contract (eliminate) two teams before the 2002 season –union furious (loss of 80 jobs, downward pressure on salaries), filed grievance –successful lawsuit by Minneapolis stadium authority helped stop contraction Nov. 2001: end of previous CBA

Key issues in 2002 negotiations Restraints on player salaries –(owners vs. union) –Union adamantly opposed to salary cap, but had agreed to LUXURY TAX in previous CBA –Revenue sharing: indirect restraint on salaries? Increased revenue sharing –(owners vs. Steinbrenner & a few others) –Issue of competitive balance Contraction Avoiding a work stoppage (one almost happened)

The final 2002 settlement Increased revenue sharing –from 20% of local revenue in 2002 to 34% –would redistribute ~$176 M a year from top- half to bottom-half teams –higher MARGINAL TAX RATES (net % of local revenue that team must pay into revenue sharing) on teams top teams: 19.5% in 2001, 37% in 2003, 39% in 2005 bottom teams: 41% in 2001 and 2003, 47% in 2005

The final 2002 settlement (cont’d) The new revenue-sharing system is 75% “straight pool,” 25% “split pool” –straight pool: revenue-sharing money is divided evenly among all 30 teams 34% of net local revenues --> straight pool –split pool: revenue-sharing money is distributed only to teams in bottom half, in inverse relation to each team’s revenues $43+ M from MLB central fund --> split pool

The final 2002 settlement (cont’d) Will the increased revenue sharing promote competitive balance? –MAYBE: Poorer teams will have more money coming their way, can spend more to improve their teams –MAYBE NOT: Poorer teams face very high marginal tax rates, because as their revenues rise they get less revenue-sharing money  reduced incentive for poor teams to get better? –Zimbalist thinks so, says new system will hurt competitive balance

The final 2002 settlement (cont’d) Luxury tax –set very high ($117 M - $136 M) –luxury-tax rates range from 17.5% to 40% of amount over limit, depending on year and whether it’s a 1st, 2nd, 3rd, or 4th offense –presence of luxury tax and revenue sharing is new, but luxury tax threshold seems too high to be binding on more than a few teams –MLB’s COO Bob DuPuy: goal is to have no teams over the threshold -- like a salary cap?

The final 2002 settlement (cont’d) Restraints on player salaries –Luxury tax unlikely to restrain much, but… –Higher marginal tax rates in revenue-sharing system will lower players’ MRPL’s, thus reducing their value to any given team If owners take this into account, salaries will go down (other things equal). Contraction dead for now –but union will not contest it after 2006 (?)

A note on cause and effect Most things have multiple causes, not just one cause. Beware the post hoc, ergo propter hoc (after this, therefore because of this) fallacy –Other factors besides the new CBA influenced baseball economics in –Such as: still-sluggish economy, reduced wealth of many owners, weaker profits in 2002, relative decline of league sports.

Player pay, one year into the CBA Average salary rose 7.2% from –but, likely driven by multi-year deals signed in previous years What fell: –Median salary fell 11.1%, from $900,000 to $800,000 –# of players earning > $1 M fell from 413 to 385 –Salary fell for most free agents: 76 players took pay cuts, averaging 60% ($1.7 M). Collusion? Some, including Marvin Miller (former union head), think so. MLB and union reached a settlement on that issue, Nov

Team payrolls, one year into the CBA The hope: Poorer teams use their anticipated revenue-sharing money to increase payroll. Did they? Yes and no. –5 of the bottom 14 teams (in 2002) actually cut payroll; the other 9 increased payroll. –Average payroll increase among bottom 14 was 8.7% ($3.8 M), compared with 3.0% ($2.3 M) among top 16. But, payroll dispersion went up. –Standard deviation rose from 36% of the mean to 39%.

Competitive balance under the CBA Competitive balance seemed to improve in 2003, despite greater variation in payrolls –correlation between payroll and winning % was significant but very low (.42; R-squared = 17%) 5 of the 10 lowest-payroll teams had winning records 3 of the 8 playoff teams were in bottom half of payrolls –dumb luck, not the new CBA, seems the reason –correlation =.52 in 2004,.49 in 2005,.53 in 2006 (R-sqs. = 27%, 24%, 28%) One measure: # of teams with winning percentages between 40-60% ( ) –In 2002: 21 –In : 24, 24, 27, 28

Competitive balance (cont’d) Another measure: Dispersion of championships –Under previous CBA ( ): 4 World Series winners in 7 years (9 WS teams total) Yankees won it 4 times no low-payroll team won it –Under CBA: 4 WS winners in 4 years –6 different league champions in first 3 years Marlins (5th-lowest payroll) won it in 2003