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does-revenue-sharing-in-mlb-foster-competitive-balance | June | 2007 Articles

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Does Revenue Sharing in MLB Foster Competitive Balance?

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This is the second installment in a series of†several articles I'm posting prior to the publication of my legal journal article, "Can Money Still Buy the Postseason in Baseball?† A 10-year retrospective on revenue sharing and the luxury tax" in the University of Denver Sports & Entertainment Law Journal.† The first in the series focused on whether Scott Boras is the most influential man in baseball.† This article will focus on the effect of revenue sharing over the past decade or so.† The next installment will focus on the luxury tax. The only form of revenue sharing prior to 1996 was the sharing of gate receipts with visiting teams.† In 1993, the total amount of money distributed under this method was around $20 million.† Beginning in the 1997 season, under a collective bargaining agreement signed in December of 1996, revenue sharing was slowly phased in using three different plans.† It's too much to go into here, but you can read my legal journal article when it's published if you'd like the specifics.† The end result was that by 2000 a plan called the Split Pool Plan was fully implemented.† For those interested in the math of it all, here it is:† it called for all clubs to contribute 20% of their Net Local Revenue (defined as†a club's local revenue less their actual stadium expenses)†to the putative pool, with 75% of that pool being equally divided amongst all of the clubs.† The remaining 25% of the putative pool was then divided between all clubs whose Net Local Revenue fell below the arithmetic mean for all clubs' Net Local Revenues in proportion to that club's distance from the mean.† Basically, it meant that everyone got a little revenue sharing, but those on the bottom end of the revenue spectrum got even more, with those†all the way at the bottom receiving the most.† By 2002, the total amount of revenue distributed between clubs was around $169 million.† Remember that under the prior method of revenue sharing only around $20 million was distributed between clubs. One of the most outspoken critics of the system was Yankees owner, George Steinbrenner.† In an article by Barry Bloom of MLB.com back in August of 2002,†Steinbrenner expressed his concern that small market teams weren't using the revenue sharing dollars they received†in an appropriate†manner.† Under the collective bargaining agreement that governed at that time, there was little direction on how†revenue sharing distributions were to be spent.† Steinbrenner†was frustrated that some teams seemed to be using their disbursements to offset losses they incurred as†owners.† He pointed out that owners of small market teams are businessmen who understand what they're getting themselves into by buying a small market team.† He thought they should be prepared to subsidize their team until it generated a profit, not depend on revenue sharing dollars to offset losses.† Steinbrenner characterized each club as a business that should be run as such by the businessmen buying the clubs.† However, this fails to factor in the fact that MLB as whole is a business, and that revenue sharing allows this one large business to subsidize weaker departments (i.e., low revenue clubs) by forcing clubs like the Yankees to share in the wealth they are blessed with as a product of their location in New York and their resulting substantial local media deals. In a USA Today article by Bob Nightengale in January 2001, Scott Boras (yes, "the" Scott Boras)†also spoke out against revenue sharing.† He thought it punished successful teams while rewarding those whose owners made no effort.† He put forth several suggestions for alternatives, which I will discuss in an article I plan to write in the next couple of days on alternatives to the current system. The complaints didn't go unnoticed, and there were some tweaks to revenue sharing in the collective bargaining agreement signed in September 2002.† Revenue sharing under this agreement was most like the Straight Pool Plan of the previous agreement.† The new agreement called for 34% of each club's Net Local Revenue (again, defined as a club's local revenue minus their actual stadium expense)†to be contributed to a central pool that was then equally divided between all 30 clubs.† The plan no longer differentiated between high and low revenue teams in redistributing the funds.† However, the plan did add a new Central Fund component, which reallocated amounts from the Central Fund to lower revenue teams.† The Central Fund is sometimes called MLB's "war chest" and is made up of monies from MLB's national television broadcasts and merchandising rights.† In addition, a new fund called the Commissioner's Discretionary Fund was created under the new agreement which also allowed for more funds to be made available to low revenue clubs.† Under the agreement, the Commissioner's Discretionary Fund was to be funded each revenue sharing year with $10 million from the Central Fund.† Low revenue clubs can request a distribution from this fund by writing to the Commissioner and detailing how the money will be spent and how it will improve the team's on-field performance.† An interesting aspect is that although the use of this fund looks on the surface to be at the discretion of the commissioner, he must notify and discuss with†the MLBPA his decision to grant or not grant such a request from a club.† Any funds not distributed from this fund at the end of the revenue sharing year are distributed equally amongst all 30 clubs.† For a more detailed look at how the Central Fund component or Commissioner's Discretionary Fund works, wait with baited breath for the publication of my legal journal article. By far, the biggest complaint about revenue sharing under this plan has been the disincentive for lower revenue clubs to improve.† The supposed rationale behind a lower revenue club doing this is that if they improve on the field, more fans will come to games, their revenue will increase, and they will lose the hefty sum they would otherwise receive from revenue sharing.† A related problem is that higher revenue teams will have disincentives to spend their money on baseball, with owners choosing instead to spend their money on other business pursuits. Red Sox owner, John Henry (whose team had one of the highest payrolls during the operation of the agreement that became effective in 2002) is one of the owners who has addressed the problems with the revenue sharing plan. While he applauds the overall improvement in baseball, he notes that as with all taxes, there is a limit at which effort and investment is discouraged. Another often heard complaint is that some clubs receive more from revenue sharing than they spend on payroll.† For example, in 2005, the Florida Marlins cut their payroll by more than 75% to a league-leading low of $14,998,500, more than $20 million below the next highest payroll. Their cut of revenue sharing amounted to approximately $31 million, leaving them with a surplus of roughly $16 million.† Such numbers make it less than surprising that owners of high revenue teams are calling for stricter controls and accounting for the way revenue sharing money is spent.† The agreement that became effective in 2002 added a provision, not present in the previous agreement,†that stated that any revenue sharing receipts should be used by a club to ìimprove its performance on the field.î †There was also a requirement that spending reports be submitted, and authority was given to the Commissioner to penalize clubs misusing funds. Unfortunately, many believe this section is without force because there is no requirement as to how detailed the spending reports must be and no team has ever faced penalties under this section for misuse of funds.† †The real loophole is touted to be that funds can be used for any number of things deemed to directly or indirectly relate to on-field performance, including spending on a clubís farm system or scouting. †Some even speculate that teams like the Marlins use revenue sharing funds to compensate for past overspending. It comes as no surprise that George Steinbrenner, the owner of the high revenue Yankees, is frequently cited with quotations such as, ìIíd like to see everybody competing, but weíre not a socialist state.

However, I must again point out that baseball as a whole can be viewed as a business, and revenue sharing as a system of subsidizing weaker departments. †Just as I said in my previous article on Scott Boras, the problem is circular: in order to generate revenue, a club must be good enough that fans pay for tickets and apparel, but the club cannot be so dominating that games become boring. †Thus, the ultimate goal is to be the best by a slight margin, which means it is in a clubís best interest that the other clubs in the league are nearly equal matches. †All of this theory and strategy is neatly packaged with the frequent reference to the need for ìcompetitive balanceî in professional sports. †Has revenue sharing increased competitive balance? †I imagine that Bud Selig would say yes. †What do you think?

For anyone curious about where I got any of the information or figures in this article, or for links to†the original articles that contained the quotes used,†feel free to email me at This email address is being protected from spambots. You need JavaScript enabled to view it. and I'll be happy to share my sources.

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