The Pirates have been so profitable that they’ve created substantial income tax liabilities for their investors. The Pirates’ solution to this problem has been to transfer a portion of its profits to these investors to cover their tax costs. This is one illustration of how revenue sharing works: it serves both to create profits for teams that cannot win on the field, and to create the need for cash to be transferred outside of baseball to cover tax liabilities that exist only because of the profits created by revenue sharing.
We’ll need to parse the numbers later, but it appears that some of the teams receiving revenue sharing (in particular, the Marlins) may be more profitable than teams like the Yankees and Red Sox that fund the revenue sharing system.
Given the information disclosed in these documents, the existing system of revenue sharing will not survive next year’s expiration of baseball’s collective bargaining agreement. This is not just my conclusion; this is the conclusion of Jayson Stark at ESPN.com. My prediction is that the current system of revenue sharing will be cut back, scrapped altogether or replaced with a more rational system.
The reactions to the leaked documents are all over the map. Most of the analysts I’ve read agree with me, and with Jayson Stark, and with Forbes editor Mike Ozanian: the leaked financials prove that revenue sharing does not work. Sports economist Andrew Zimbalist said that “there’s a reason to be skeptical and cynical about what’s going on (in Pittsburgh).” Sports Illustrated’s Joe Sheehan concludes that baseball’s revenue sharing serves to “incentivize sloth and aggressively diminish a franchise’s motivation to move upward.”
David Berri, one of the economists I cited here on Monday, put it this way: “ Teams have a choice. They can seek to maximize winning, what the Yankees do, or you can be the Pirates and make as much money as you can in your market. The Pirates aren’t trying to win.”
(And if you think people are upset about the Pirates, you should check out the commentary about the Marlins).
There’s another group of opinions out there, including the one expressed by Brien here. Rob Neyer’s take seems to be that teams should not be required to spend all of their revenue sharing money. Neyer focuses on the Pirates: he points out that it would not have helped the Pirates to use their unspent revenue sharing money to retain the established players that the team has shed over the past few years: Jason Bay, Freddy Sanchez, Nate McLouth, Xavier Nady, Damaso Marte, etc., etc. Good point.
But the Pirates can use revenue sharing for purposes other than resigning marginally productive “established” players. Why couldn’t the Pirates have signed more Latin American teenagers? Or built a baseball academy in China? Is there no use the Pirates could have made of this revenue sharing money? If so, this state of affairs undercuts the need for revenue sharing in the first place. We were told that the Pirates were too poor to build a competitive team. Instead, we’re now being told that the Pirates don’t need much money to solve their problems, or that the Pirates’ problems are ones that money cannot solve.
Another response to Rob Neyer is that baseball need only pay “poor” clubs the amount that they can productively use to improve their teams. As we’ve reported earlier, baseball’s revenue sharing system requires recipient teams to file a plan with major league baseball detailing how they plan to use their revenue sharing money to improve the team’s performance on the field. If the Pirates’ plan says that they only need $10 million in 2011 to fulfill their plan, then we should only pay the Pirates $10 million – not $30 million, or $40 million. If the Pirates say they need $40 million and only spend $10 million, then we should require them to give back the other $30 million – and perhaps we should give the $30 million to a team that can productively use the money. Instead of the Pirates using millions of revenue sharing to increase profits and create (and then pay off) investor tax liabilities, why not transfer the money to the Brewers so they can resign Prince Fielder? Or to the Rays so they can resign Carl Crawford?
Baseball Prospectus’ Shawn Hoffman argues that not all teams have abused the revenue sharing system. Good point. Then the teams that successfully use revenue sharing to improve on-the-field performance should be the only teams to receive revenue sharing. Unfortunately, the current system works in the opposite way: it encourages teams to underperform, as the worst performers are the biggest recipients of revenue sharing.
My preferred alternative is to eliminate the requirement for teams to use revenue sharing solely to improve the ballclub. This requirement is unenforceable. I personally favor a revenue sharing system based solely on the potential of each team’s local market. The Yankees live and thrive in baseball’s biggest market; why not have the Yankees pay something for the semi-exclusive right to this market? Yes, yes, I know: we can argue on how to measure market size, and we have to deal somehow with the guys who recently paid a premium to buy a team in a big market. These are serious problems, to be sure. But they’re child’s play compared to trying to figure out how to force a crummy team to effectively spend millions of dollars to become a championship team. Hell, if the Mets cannot figure out a way to do it, why should we expect the Pirates to do any better?
OK, maybe you don’t like my proposed system, but that doesn’t mean that we should retain the existing system. It’s silly and stupid to have a revenue sharing system that is based on the supposed inability of certain teams to afford to be competitive, that then allows these teams to keep the money it claims it cannot spend productively. This system is like a charity that appeals to us for millions of dollars for disaster relief, and then decides that disaster relief is a bad idea. In real life we’d require the charity to return the money, and we wouldn’t make further contributions to the charity. Only in baseball do we allow teams to (1) beg for charity, (2) decide that they don’t need the charity, (3) line their pockets with the charity and (4) beg for more charity.
The current system is a sham. The sham has been exposed. The sham will not survive. Not in its current form.
I will do my level best to post further analysis of the leaked financial statements in subsequent posts.