MLB Under the 2002 and 2006 Collective Bargaining Agreements (CBAs)

New CBA (Dec ) Announced in late Oct –Reached with minimal rancor between players, owners –Current prosperity of MLB made it easier Selig: 25 of 30 teams are profitable Some owners still want payroll cap, but not at expense of strike Contraction a dead issue “Five years of labor peace” Broadly similar to current ( ) CBA –Selig, most owners had been very happy with 2002 CBA –Players a bit less happy MRPLs (and salaries) rose more slowly due to revenue-sharing taxes Salaries rose, but salary share of revenues fell Strike probably not worth the lost income, however

How the New CBA Is Like the 2002 CBA Revenue sharing –Extensive compared with pre-2002 CBAs –Same amount as 2002 CBA initially ($326 M in 2006) Will rise as revenues and revenue disparities rise Luxury tax on high payrolls –Still too high to affect more than a few teams –But likely to become more binding Tax threshold rises slowly (<5% per year), probably slower than revenues Steroids/drug program (actually began in 2005)

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 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) Q (at the time): 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 thought so, said system would hurt competitive balance. (Was he wrong?)

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 was new, but luxury tax threshold was 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 didn’t restrain much, but… –Higher marginal tax rates due to revenue sharing reduced players’ MRPL’s to their teams, as the team doesn’t get to keep as much of the extra revenue the player generates If owners take this into account, salaries would go down (other things equal). –Did this happen? Yes, in the sense that salaries grew more slowly than revenues. –In first offseason under CBA, average salary rose but median salary fell and 76 free agents took pay cuts.

How the New CBA is Different Revenue-sharing tax system is changed –(Zimbalist helped draft the new CBA) –Marginal tax rate on local revenues = 31% for all teams Lower than before (  will boost player MRPLs) Previously was 39% for richer teams, 48% for poorer teams –  poorer teams had less incentive than rich teams to improve their team and revenues »Payroll disparities were higher in than before, despite increased revenue sharing. »Then again, marginal tax rates were even higher for poor teams (40%) relative to rich teams (20%) just before “Fixed concept of revenues”: revenue-sharing transfers no longer linked so closely to current-year revenues

Other Changes From the 2002 CBA to the 2006 CBA Some relatively minor tinkering with: –The amateur draft –Free-agency and draft-choice compensation –Higher minimum salaries