Bill James on the need for “perverse economic incentives”

What are some ideas? I’ve heard people say teams that don’t reinvest their revenue-sharing money shouldn’t be allowed to turn a profit.

I don’t know, but that sounds like an invitation to creative accounting. I imagine they might find a way for some other corporation with which they have a relationship to turn a nice profit.

Gross revenue? Net revenue?  You have any idea what’s coming out to go from one to the other?  Ask the McCourts and their amazing salaries to themselves and their non-baseball-working sons.  Point is, a lot of things can happen before we get to gross revenue.  Another idea of mine which I have mentioned many, many times: If you’re among the “top 5” revenue sharing beneficiaries, your books should be open to MLB’s forensic accountants.  As I said here:

The top 5 teams that take in the revenue sharing/luxury tax payments must provide audited financial statements to MLB to “prove” they spent the handouts on improving the club via “sources and uses” schedules. If the team can’t prove they used the funds to improve their clubs, they either forfeit the following year’s payments or must refund the current year’s payments.

Salary floor? Ceiling?

It could be that the time has come to incentivize winning by the players. The players might — I’m not sure if you’d get resistance from that, but that would be one approach. The problem with the game being too well off is that teams can make money in ways that aren’t generally intended. John Henry had a proposal about it. Another proposal was the teams that are non-competitive over a period of years could be required to sell the team. The owners of, say, the Salt Lake City Cellar Dwellers. You haven’t competed for 15 years, it’s time to sell the team. That might be one way to approach it.

Hear that Pirates and Royals?  Bill James is a’comin’ after you!  Or, as I said here, my solution:

Teams that are amongst the bottom 3 in terms of payroll for five years in a row are prohibited from receiving payments for the following year (a motivation to spend)

About @Jason_IIATMS

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5 thoughts on “Bill James on the need for “perverse economic incentives”

  1. Jason, I understand your position that clubs need to be accountable for what they do with their revenue sharing.  But how do you enforce a standard that requires clubs to spend their revenue sharing to improve the club?  The best way to improve the club may be to increase payroll for players … or it might be to improve the club's player development system.   Perhaps a low revenue ballclub should invest its revenue sharing to boost its fan base and thus enhance its future revenue stream. 

    I've read that clubs should be barred from using revenue sharing to reduce club debt.  But reducing debt might be the best way to improve the club going forward.  Maybe the interest on the team's debt is so high that the team does not have enough cash flow to pay for team improvements.

    Sure, we would not want to see revenue sharing dollars used to pay lavish salaries to the sons and daughters of team owners.  But you won't prevent this sort of thing by requiring revenue sharing to pay for team improvements.  For example, let's say that a team has a $30 million payroll for player salaries, and a $30 million payroll for the sons and daughters of the team owner.  The team can simply say that it applied the revenue sharing to the player salaries, and that the money paid to sons and daughters came from somewhere else.

    You've got an economics background, so think about this problem from the standpoint of a Wall Street investor, or a bank about to make a loan to a business.  The bank/investor would never say, "here's $30 million, but you have to spend the money on improving your business."   No, instead the bank/investor would want to see the business plan, including financial projections, and would want a detailed explanation of what the business planned to do with the $30 million.  Then the bank/business would set up objective targets going forward: the business would have to increase sales by x%, or profits by y%.  If the business failed to meet its targets, then the bank would call its loan, or the investors would put their own management team into place.

    I understand that it's not a simple thing to evaluate a business plan, or to set up and measure objective benchmarks.  But I think we're kidding ourselves if we think that there's any simpler fix to the revenue sharing problem.

  2. BTW, and I say this with all due respect to Bill James, but the idea of forcing the sale of non-competitive teams has to be one of the ten dumbest ideas I've heard all year.  

  3. What if the revenues that are shared don't actaully go "to" the teams. Rather, they sit in a coffer that has joint custody between the team and the league. If these funds are not used, you could

    a. generate interest income for the league (or charities, etc.)

    b. re-distribute these funds if they are not used within a period of time (1-2 seasons).

    I know this probably sounds a little state-controlled, but, after all we are talking about revenue-sharing, which isn't exactly laissez-faire to begin with.  It's actually not their money until they use it.

  4. Larry, in response to your point, again the McCourts provide a great example of how "debts" may or may not be the result of baseball operations, and I just don't trust forensic accounting enough to have them distinguish it. If you take money from the league, you are, in some, form a ward of the league. By accepting this money (sort of like TARP, just with better over-sight), you must get sign off on how it's being spent. It does beg a question of what are reasonable expenses, but that feels like another door opening to creative accounting.

    By the way, it's 2010, I suggesst using a different analogy than a Wall St. Banker….

  5. Ches, LOL about Wall Street bankers!  OK, I'll use Warren Buffet next time.

    I think you're making my point.  You can look at how a given team spent its revenue sharing, and there's no way to prove one way or the other that the spending was used "to improve the club". 

    No argument: a club may incur debt for any number of reasons, not all of them good.  But while a team might not benefit from a particular loan, it may still be beneficial to get the loan paid off.   

    In my guest blog last week, I argued at length for what you're recommending: that in order to get maximum revenue sharing money, a team should have an MLB-approved plan for how the money would be spent.    I also argued that any such plan should contain objective benchmarks that would have to be met in order for the team to continue receiving revenue sharing money.  I like your idea of placing revenue sharing money in an MLB fund, where it would be available to a team once the team's plan received MLB approval.

    In short: great posts!