ZIPF: MLB salary cap may cause economic trouble

Michael Zipf

Many detractors of Major League Baseball’s current revenue system, along with a plethora of small market teams, are citing 423.5 million reasons why baseball should implement a salary cap. Depending on who you ask, a salary cap would either save the game, destroy the player’s union, evoke a rejuvenated spirit in small mark fans, pervert the free market or create a tangle of red tape that would turn every trade deadline into a battle of wits among dueling accountants and financial analysts. With all the ambiguity and controversy surrounding this conundrum, the only certainty in this issue is that it will be a focal point during the 2011 collective bargaining agreement.

Conventionally, a salary cap ensures a competitive balance in baseball, yet the facts and logistics behind a salary cap indicate a different sentiment. Indeed there is a great discrepancy in payrolls between teams such as the New York Yankees, Boston Red Sox and Chicago Cubs and the Florida Marlins, Tampa Devil Rays and Kansas City Royals. However, realigning baseball’s current system defies the capitalist and free market aspects of our society that are our economic pillars. Finally, there is an important catch that small market teams fail to recognize, for example the Florida Marlins, a small market team, needs to keep winning in order to stay financially viable under most proposed salary cap systems. And even then, winning might not be enough.

Let’s say in 2011, MLB owners and players actually agree on salary cap with the normal provisions: a salary floor at around 75-85 percent of the cap and a guaranteed percentage of total industry revenues for the players. Typically players have received 45 percent of the revenue during the past few years. During 2008, 30 teams earned about six billion dollars or an average of 200 million per team. After going through the calculations, baseball’s salary cap would hover between 77 and 103 million dollars. A 103 million dollar salary cap would affect nine teams whose salaries were over that – the most notorious being the Yankees, who would have had to skim 286 million off the top.

As a result of total salaries remaining constant, the bottom 21 teams would have to endure this burden. About 14 teams would have been under the payroll floor of 77 million dollars by a total of 251 million dollars. Excluding the Florida Marlin’s 22 million dollar payroll, which is less than the annual salary that the Yankees gave prominent free agent CC Sabathia this offseason, 13 teams would have to spend an average of 15 million more just to meet the salary cap minimum.

Imagine you’re Frank Coonnelly, president of the Pittsburg Pirates and major proponent of a salary cap. Hypothetically, if last season’s salary cap was instituted, the Pirates would have receievd a nice 28 million dollars in their mail. As a result, such an organization’s long-term strategy would be ruined and the team would be forced to sign several aging veterans to meet the minimum payroll.

The Pirates, due to their recent history and a downward spiraling economy, would face a top line hit of 10 million dollars. Meanwhile, teams such as the Yankees and Mets who are opening billion dollar ballparks would receive an increase in local revenue by 50 million. Leaving the other 27 teams’ payrolls flat, the total industry revenue rises by 90 million, which excludes any appreciation in media revenue. With 45 percent of the revenue directed to the players, the Pirates purchasing power actually decreases, while the payroll floor actually rises. Therefore, without a more egalitarian distribution of income, the system crumbles.

Owners such as John Moores, president and owner of the San Diego Padres, believe baseball is in jeopardy of seeing its fans drift away as smaller market teams “suffer in futility.” However, when measuring whether poor revenue potential is locking teams out of a pennant race for years at a time, the numbers are less conclusive. Since the expanded playoffs began in 1995, 22 of the 30 big league teams have reached the postseason at least once. Compare that to baseball’s golden age, when free agency did not exist and there was a marginal discrepancy in payrolls. The Phillies, who just won the World Series, went thirty years without finishing higher than fourth place.

Ultimately, if you chart postseason appearances against average team revenue, the latter accounts for little more than half of the team’s chance for getting to the postseason. This may indicate that baseball’s system creates an inequitable advantage to large market teams.

Another indicator is to compare postseason appearances with TV market size. Large market teams such as the Yankees, Mets and Red Sox possess a substantial advantage, but smaller market teams such as the Cardinals or the Indians have been successful as well. In actuality, the correlation between market size and playoff participation is extremely weak. Market size accounts for only 11 percent of postseason chances. It would be na’ve to place bets solely based on TV market size.

Taking all of this into consideration, what’s the best solution? Certainly not the NBA’s soft cap system or the NHL’s hard cap – where as the league grows it ends up leaving small market teams behind. Until recently, the NFL has been uniquely adept for this type of egalitarian income distribution. So while all the capped leagues are struggling to find the right balance between capitalism and socialism, baseball continues to prosper (26 out of 30 teams with positive net operating margins in 2008) by operating within a much more free market system. It has been said by many that “if it ain’t broke, don’t fix it.” When looking at the possibility of a salary cap in baseball, those making the decision should listen to that advice before they make any decisions.

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Michael Zipf is a senior accounting and finance major from Morristown, N.J. He can be reached at [email protected]