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Last Week in Bizball: The Debate Over the New MLB CBA Continues PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Wednesday, 11 January 2012 09:35

Last Week in Bizball by Pete Toms

This week in “Last Week in Bizball, debate over the new CBA continues.

As you know, late last year, MLB and the MLBPA concluded negotiations on a new “basic agreement” (aka CBA), which governs the industry for the next five seasons. Since the details of the new CBA were released, the baseball punditry has been busy predicting what impacts the new agreement will have both on, and off, the field.

The immediate response in the press focused on changes to the Rule 4 draft (aka amateur draft). Going forward, each club will be assigned a “signing bonus pool” dollar amount covering the first 10 rounds of the draft. Each club will be assigned a different “bonus pool” amount, based on the previous season’s winning percentage. The team with the worst winning percentage is assigned the largest “bonus pool” and the team with the best is assigned the smallest. The bonus pools for the upcoming draft range from approximately $4.5 million to $11.5 million. There is no restriction on what a club can spend on any individual pick in the first 10 rounds, but there are severe penalties, both in forfeiture of future picks and $$, for exceeding the assigned “bonus pool” amount. In addition, beginning in 13, the Rule 4 will include “competitive balance lottery” picks. Six of these picks are positioned between the 1st and 2nd rounds and another six between the 2nd and 3rd rounds. Only the 10 bottom teams in local revenue/market size will participate in the lottery following the 1st round. The 4 teams not awarded a lottery pick after the 1st round, plus any other revenue sharing payees, participate in the lottery following the 2nd round. These picks are tradable, but only for players and not for money.

The Rule 4 changes are intended to resolve the long standing issue of “signability”. Many have argued for years that the draft in MLB has been a misnomer, operating as a de facto auction. Changes to the Rule 4 are intended remove the “signability” factor and, in turn, allow the draft to fulfill its purpose of allowing the worst teams to acquire the best amateur players. But, in recent years, some chronically uncompetitive clubs (Royals, Pirates, Nationals) have ignored “signability” concerns in the draft, outspending large revenue competitors. So, will the new rules governing the Rule 4 contribute to more, or less, competitive balance? In late November I blogged about the widespread negative reaction to the changes. These critics argued that the changes will contribute to greater competitive imbalance by punishing small market teams from being aggressive in the draft. The next week I brought attention to the opposite argument, presented by leading sports economist Andrew Zimbalist. Zimbalist argues that the recent big spending of the Royals, Nationals and Pirates in recent years is simply an outcome of their positions atop the draft. He points out that, “The third-highest draft spenders over the last three years were the larger-market Red Sox, while the smaller-market Marlins, Twins and A’s were all among the lowest spenders (each spending less than $5 million a year).”

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LWIB, the debate continued. Rob Tillis, CEO of Inner Circle Sports, was interviewed on Forbes SportsMoney (video here). Tillis is a prominent sports banker. He founded ICS in 02. Prior to starting ICS, Tillis headed JP Morgan’s sports financing division for 15 years. Search the ICS site and you will find a very impressive list, both in breadth and stature, of franchise, stadia and sports media deals that they have been at the centre of. So, what are Tillis’s thoughts on the impacts of the new CBA? Of the new draft model, he says it, “…neutralizes the playing field for everyone..” and will “..create more competitive balance in the league..” While Tillis acknowledges that some low revenue teams have been very aggressive in the Rule 4, he, like Zimbalist, points out that some large revenue teams have done the same.

While the Rule 4 changes aim to distribute amateur talent more equitably, they also bring an end to commissioner Selig’s efforts to control spending in the draft via his office’s “slot recommendations”. Jim Callis, the Executive Editor of Baseball America, and Rule 4 expert, has long been a harsh critic of “slotting”. Callis has consistently argued that “slotting” has been ineffective in controlling the rapidly escalating costs of acquiring elite amateur talent. In addition, he has argued that clubs who adhered to Selig’s “slots” were left in a severely disadvantaged position to their competitors who ignored “slots”. While the new CBA does not include slots per se, the severe penalties for exceeding “bonus pool” will result in MLB (with the PA’s agreement) exercising much greater control over spending in the draft than it did via “slot recommendations”. One might think that Callis would be critical of MLB’s increased control over individual club spending in the draft, but he has not been one of the naysayers. In a column titled, CBA Shouldn't Squash Small-Market Teams' Chances, he wrote:

When details of the new Collective Bargaining Agreement began trickling out, initial reaction from many scouting officials and agents was that MLB and the Players Association had killed the draft. And along with it, almost any chance small-revenue teams had to compete.

As more particulars became available, it became apparent that rumors of those deaths had been greatly exaggerated.

During the five years of the previous CBA, the draft's biggest bonus spenders were the Pirates ($52.1 million), Nationals ($51.1 million) and Royals ($45.2 million). It made sense for the have-nots to mine the draft because it's the biggest bargain in player acquisition and the only arena in which they could realistically compete with wealthy franchises.

MLB's old informal slotting system was a boon to teams that wanted to assert themselves in the draft. It all but ensured that gifted players with high price tags would fall to clubs willing to pay them.

Callis goes on to compare how the new Rule 4 rules would have impacted on the 12 drafts of the Pirates and Red Sox. The Pirates, picking atop the draft, spent over $16 million in the first 10 rounds.. The Red Sox, picking near the bottom, spent $10 million in the first 10 rounds. (He also notes that the large revenue Red Sox rank 4th in draft spending over the last 5 years) According to Callis’s calculations, both teams would have had less money to spend under the new rules but he concludes that the restrictions on spending will be of more benefit to weaker clubs. “ But going forward, the least fortunate clubs will have much bigger plates than other teams.” And, “Teams no longer will be able to gorge themselves on the draft to their heart's content. The less successful teams won't go hungry, but the more fortunate clubs may find themselves starving for talent.” In a separate post compiled by Callis and his BA colleague J.J. Cooper, they noted that the Mets and White Sox, both big market teams, should benefit because they were amongst the teams who never spent “over slot”. The also wrote, Under the new system, successful teams will have a significantly smaller draft allowance than teams picking at the top of the first round….Add in restrictions on the amount teams can spend on international talent and teams like the Red Sox and Yankees will be severely limited in how much they can spend.”

The impact of the Rule 4 changes on future competitive balance might not even be fully revealed come the expiration of this new CBA. However, there are fundamental changes to revenue sharing in this CBA which may already be impacting on competitive balance. LWIB Peter Gammons wrote a column titled, Big markets remain silent during strange winter. Gammons notes that the Dodgers and Mets have been inactive in the free agent market thus far this off season due to owner issues. And the Chicago franchises are in the initial phase of cycling up, a process that, at this stage, does not include taking on big, long term, contracts. But, why have MLB’s superpowers, the Yankees and Red Sox, combined, to date, not signed a single FA of note? Gammons quotes an unnamed general manager, "The Yankees and Red Sox are not competing in the market and actually seem to be cutting back because of the present and future luxury tax ramifications.” Since 03, MLB has collected an annual, so called, luxury tax (officially the Competitive Balance Tax, aka the Yankee Tax). The CBT has effectively served as a hard salary cap in MLB, save for the Yankees, who have paid 91%, over $200 million, of the entire total collected since 03. (see Maury Brown) But, are there sufficient incentives for the Yankees in this new CBA that, they too, will no longer exceed the luxury tax threshold? Last month Joel Sherman wrote:

To understand the Yankees' current thinking, you must understand that no team stands to lose or gain more from the newly agreed upon collective bargaining agreement.

AND

For if they are at $189 million or less for the three seasons from 2014-16, they not only avoid paying one cent in luxury tax, which would rise to 50 percent for them as repeat offenders, but they also would get roughly $40 million in savings via the to-be-implemented market disqualification revenue sharing program. However, only teams under the luxury-tax threshold get reimbursed in this program, which is designed to prevent big markets such as Toronto and Washington from receiving revenue sharing dollars, which in turn will lower how much teams such as the Yanks pay (as long as they are under the threshold).

The aforementioned Rob Tillis was asked if the newly implemented revenue sharing rebates were the reason behind the Red Sox and Yankees inactivity this off season. Tillis responded that he, “wouldn’t bet on it”, noting that when the CBT was introduced, many predicted (wrongly) that it would curtail Yankees payroll spending. Others suspect that the Yankees are saving their money for next off season when Matt Cain and Cole Hamels, both more appealing than Yu Darvish or CJ Wilson, could be free agents.

This new CBA, for the first time, contemplates a franchise’s market size. In terms of the Rule 4, small market teams will receive extra picks via the aforementioned “competitive balance lottery”. As well, over the course of the new CBA, large market franchises will no longer qualify as revenue sharing payees. Following the announcement of the concluded CBA negotiations ESPN reported:

And there is a new market disqualification test as an incentive for clubs to increase revenue, preventing teams from large markets from receiving revenue-sharing proceeds.

By the end of the labor deal in 2016, teams in the 15 largest markets will no longer be allowed to receive revenue-sharing funds, regardless of their TV contracts or attendance, a source told ESPN.com's Jayson Stark.

According to the source, the 15 teams that will be ineligible for revenue sharing by 2016 are the Yankees, Mets, Dodgers, Angels, Cubs, White Sox, Phillies, Red Sox, Rangers, Braves, Nationals, Blue Jays, Astros, Giants and Athletics.

The A's will be eligible for revenue sharing until their stadium situation is resolved, the source said.

Mike Ozanian of Forbes and Jon Heyman of CBS are amongst those speculating that the Blue Jays and Nationals are the 2 large market revenue sharing payees facing the greatest pressure from the new market disqualification rule.

So, the debate continues. Maybe “signability” remains a problem. Ultimately, if a HS player doesn’t get the bonus they believe they deserve they can still opt for a college program. The same is true for college players, who like James Paxton in 09, can opt to play independent baseball and re-enter the draft the following year. And, maybe the Yankees spend a combined $500 million next off season on Cain and Hamels. After all, the Yankees have a lot of competition for the entertainment dollar in NYC and the YES beast needs to be fed. None of us knows how it turns out but isn’t that the reason we watch?

You can follow me on Twitter @PeteToms


Pete Toms is senior writer for the Business of Sports Network, most notably, The Biz of Baseball. He looks forward to your comments and can be contacted through The Biz of Baseball.

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