MLB

1
MLBs 2003-2006 Collective Bargaining Agreement
(CBA)
2
Baseballs 2003-2006 CBA, in brief

• Reached on Aug. 30, 2002
• first settlement in 30 years without a work
  stoppage
• Lasts four years ends in Dec. 2006
• New agreement (2007-2011) retains its key
  features.
• Supposed to promote competitive balance
• increased revenue sharing
• luxury tax (old one existed only in 1997-99)

3
Background

• General climate of ill will and conflict
• 8 work stoppages since 1972 (5 strikes, 3
  lockouts)
• Owners collusion against free agents in 1986-88
  intensified unions distrust of owners
• Last work stoppage (1994-95) lasted 232 days,
  forced cancellation of 938 regular-season games
  and 1994 postseason
• --gt alienated fans average attendance fell 21
  from 1994 to 1995

4
Background (contd)

• 1996-2001 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 (MLBs 2000
  report 27 of 30 teams lost money over 5-year
  span)
• Worsening competitive imbalance

5
Background (contd)

• 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

6
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)

7
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

8
The final 2002 settlement (contd)

• 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 --gt straight pool
• split pool revenue-sharing money is distributed
  only to teams in bottom half, in inverse relation
  to each teams revenues
• 43 M from MLB central fund --gt split pool

9
The final 2002 settlement (contd)

• 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

10
The final 2002 settlement (contd)

• 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
  its 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
• MLBs COO Bob DuPuy goal is to have no teams
  over the threshold -- like a salary cap?

11
The final 2002 settlement (contd)

• Restraints on player salaries
• Luxury tax unlikely to restrain much, but
• Higher marginal tax rates in revenue-sharing
  system will lower players MRPLs, 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 (?)

12
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 2003.
• Such as still-sluggish economy, reduced wealth
  of many owners, weaker profits in 2002, relative
  decline of league sports.

13
Player pay,one year into the 2003-2006 CBA

• Average salary rose 7.2 from 2002-2003
• 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 gt 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. 2006.

14
Team payrolls,one year into the 2002-2006 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.

15
Competitive balance under the 2002-2006 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 (.400-.600)
• In 2002 21
• In 2003-2006 24, 24, 27, 28

16
Competitive balance (contd)

• Another measure Dispersion of championships
• Under previous CBA (1996-2002)
• 4 World Series winners in 7 years (9 WS teams
  total)
• Yankees won it 4 times
• no low-payroll team won it
• Under 2003-2006 CBA
• 4 WS winners in 4 years
• 6 different league champions in first 3 years
• Marlins (5th-lowest payroll) won it in 2003