Economic perspective of Baseball's Collective Bargaining Agreement of 2002
...s the imbalance of small and large market teams. In 2001 the Yankees collected $217.8 million dollars in revenue. In comparison the aforementioned Montreal Expos collected $9.8 million dollars. How can a team compete at that inequality? Thus Bud Selig and the owners proposed a new plan for solving both problems. The deal is a new collective bargaining agreement. Collective bargaining consists of negotiations between an employer and a group of employees that determine the conditions of employment. The result of collective bargaining procedure is called the collective bargaining agreement or CBA. Often employees are represented in the bargaining by a union or other labor organization. Collective bargaining is governed by federal and state statutory law, administrative agency regulations, and judicial decisions. And since the strike of 94, the players union has been in control of any negotiations. But now the ball is in the owner’s court, and they took the initiative by proposing a new agreement based on increased revenue sharing and a luxury tax. The deal, agreed on prior to 2002 season, and will last until after the end of next season. It expires on December 19th, which happens to be the last day for owners to offer a new contract to unsigned free agents. The owners have gained some leverage on the players union but the union still has the upper hand. As a matter of fact the new agreement doesn’t affect the players greatly. The agreement is more directed to the owners and creating balance among the small and large markets. A luxury tax in the sports sense is a surcharge put on the aggregate payroll of a team to the extent to which it exceeds a predetermined guideline level set by the league. The ostensible purpose of this "tax" is to prevent teams in major markets with high incomes from signing almost all of the more talented players and hence destroying the competitive balance necessary for a sport to maintain fan interest. There is nothing regulating players salaries, but punishes owners for paying the inflated salaries. But in many situations the owner would be willing to pay the cost to the players and the league for the immense ability and fanfare a player brings to a team. The Yankees payroll is upwards of two-hundred million dollars, regardless of any luxury tax and revenue sharing. Did they think twice in trading for Alex Rodriquez, arguably the best player in the sport and one of the biggest draws, along with the two-hundred fifty million dollar contract? Under the new system if the Yankees are scheduled to pay extra ten million dollars in luxury tax this year than if they didn’t have the star third baseman on their payroll. That’s more money than the Expos made in the 2004 season. The terms of the luxury tax are as follows: No luxury tax in 2002; $117 million in 2003, $120.5 million in 2004, $128 million in 2005, $136.5 million in 2006. Luxury tax expires on the final day of the 2006 season, so if the parties play under the terms of the expired agreement in 2007, there will be no luxury tax. There was no tax in 2002 but in the proceeding years there is a base rate and increased rates for repeat offenders. For example, let’s say the Yankees payroll was 2 hundred million and the rate for third time offenders was forty percent. The tax level is $128 million. Thus the Yankees would pay forty percent of seventy-two million or $28.8 million. The Yankees have had to pay the tax for each of the last three seasons. The Boston Red Sox and Anaheim Angels have had to pay the last two seasons. Thus far they are the only teams that have been taxed. Luxury tax money is to be used for player benefits, the industry growth fund, or player development in countries lacking organized high school baseball. So by the Yankees overspending they are benefiting youth baseball in other counties. The other main aspect of the CBA is revenue sharing. Revenue sharing is the main feature in the creating competitive balance in baseball; in attempts to decrease the disparity between the large and small markets. The old CBA called for 20% of baseball expenses to be shared. Under the new agreement, 34% of expenses are to be shared. This money is to be split equally amongst every organization, all based on the average amount of revenue. Now these teams that receive the money, they are supposed to use this money to benefit the on field team. But are they using it to benefit the on field performance or their pockets performance. There are ways around this. For instance, Selig’s Milwaukee Brewers used the money to make improvements on there new stadium. How that affects the on field performance is beyond me. There are teams that used the money to really alter their team. A few examples are the two teams that won the World Series after the agreement. In 2002 the Angels received thirteen million dollars from revenue sharing. Although they didn’t make any significant changes in there team, they did move on to defeat the Yankees in the playoffs and later won the championship. It seems odd how a team from Anaheim, part of the second largest market in the nation, and they need help generating a profitable organization. Prior to the 2004 season, the Angels signed free agent and former Expo Vladimir Guererro. The result, Vlad received the most valuable player award and a third consecutive division title. The catch 22 is that by signing Guererro and a few other free agents, the Angels now have to pay the luxury tax. In 2003 the Florida Marlins received twenty-one million dollars in revenue sharing. How did they use that money, the resigned a few key players and signed a major free agent? The result from there spending was also a World Series victory. Among the Marlins in the league championship series that year were the aforementioned Yankees, Red Sox, and the Chicago Cubs, respectively 1, 2 and 6 in the highest total of revenue paid. And the Marlins, with some luck, were victorious. The problem with this scenario is the affect of the spending now. Sure they won a championship, but now the team is in financial trouble. The star player they signed only played the one season in Florida and attempts to reach the playoffs have failed. And with many key players approaching the end of their contracts the team is being forced to unload much of their talent. As a matter of fact, the Marlins traded the MVP of the 2003 World Series and another player a staple on the team away today for prospects. This is common for teams that cannot afford to sign potential free agents. The fire sale is only just beginning. They are believed to sell much more of their talent. And to make things worse, the organization located in Miami, the sixth largest market in the country, is struggling to get support from the city. The city is unwilling to help the team pay for a new stadium a...