Originally posted on Fangraphs  |  Last updated 7/8/13
Major League Baseball’s attempts to narrow the gap between franchises has resulted in an incentive system. While other leagues have salary caps and floors, Major League Baseball has instituted a system of luxury taxes (to bring down the highest payrolls) and revenue sharing (to bring up the lowest ones). As I noted in a piece for ESPN The Magazine this spring, the system has been pretty effective too, as we are currently experiencing an age of parity unlike any time in MLB history. However, incentives don’t work in every situation. You can carrot-and-stick your way to success on a broad level while still having some individuals fall through the cracks. Overall, I think MLB’s financial system is mostly as effective at promoting competitive balance as a hard salary cap would be, but that doesn’t mean that the system doesn’t have some flaws. And, with the Ricky Nolasco trade, the Miami Marlins are shining a bright light on the system’s flaws once again. If you look through the Collective Bargaining Agreement that MLB and the Player’s Association agreed to, you will not find the parameters for any predetermined payroll minimum that teams must meet, but there actually is a minimum payroll in MLB. Well, sort of. It’s not codified — at least, not in this publicly available document — or defined, but it definitely exists. In this story, published on MLB.com on January 12th, 2010, we see a reference to the minimum payroll by both MLB and the Player’s Association. Here’s the Player’s Association part of the statement: “In response to our concerns that revenue-sharing proceeds have not been used as required, the Marlins have assured the union and the Commissioner’s Office that they plan to use such proceeds to increase player payroll annually as they move toward the opening of their new ballpark,” MLBPA executive director Michael Weiner said. “Today’s agreement, which covers the period 2010-2012, calls for ongoing communication among the Marlins, the Commissioner’s Office and the union as the Marlins proceed with that plan. “It also permits, after consultation among all parties, adjustments in the Marlins’ plan to respond to unforeseen developments, and calls for arbitral intervention if disagreements arise. We greatly appreciate the willingness of the Commissioner’s Office and the Marlins to engage with us and ensure that all terms of the Basic Agreement are met.” And here’s the Marlins part. “The Marlins have consistently made every effort to put the best product on the field, and our record supports the fact that we have been successful in that regard,” Marlins president David Samson said in a statement. “Throughout the discussions, the Marlins maintained that there had been no violation of the Basic Agreement at any time. While we know that the Marlins will always comply with the Basic Agreement, we were happy to work cooperatively with the union and the Commissioner’s Office on this matter.” As Alden Gonzalez noted in the linked article, the section of the CBA that was referenced at the time was Article XXIV(B)(5)(a). While the CBA that was in effect then has since been renegotiated, that article still exists in the current CBA, as you can see on page 130 of the PDF. Or you can just read the whole clause below. (5) Other Undertakings (a) A principal objective of the Revenue Sharing Plan is to promote the growth of the Game and the industry on an individual Club and on an aggregate basis. Accordingly, each Club shall use its revenue sharing receipts (from the Base Plan, the Supplemental Plan and the Commissioner’s Discretionary Fund) in an effort to improve its performance on the field. The following uses of revenue sharing receipts are not consistent with a Club’s obligation under this paragraph 5(a) to use such receipts in an effort to improve its performance on the field: payments to service acquisition debt or any other debt that is unrelated to past or future efforts to improve performance on the field; payments to individuals other than on-field personnel or personnel related to player development; payments to entities that do not have a direct role in improving on-field performance; and distributions to ownership that are not intended to offset tax obligations resulting from Club operations. Consistent with his authority under the Major League Constitution, the Commissioner may impose penalties on any Club that fails to comply with this subparagraph 5(a). The Commissioner, in addition to other penalties he may impose for violations of any aspect of this subparagraph 5(a), may require a Club to submit a plan for its financial performance and competitive effort for the next two years. Such a plan must include a pro forma financial presentation that specifies its attendance, revenues, payroll, player development expenditures, non-player costs, and capital spending. The Commissioner, after consultation with the Players Association, may direct the Club to change aspects of its plan, including the level of competitive effort reflected in the plan, or take other actions as he considers appropriate (including escrow of a portion of a Club’s revenue sharing payments). The Association has the burden in any proceeding under the Grievance Procedure of demonstrating that the Club’s use of its revenue sharing receipts was in violation of this subparagraph 5(a). In any such Grievance, the Arbitration Panel shall consider, among other things: (i) the Club’s expenditures on scouting, player development, and player payroll; (ii) the Club’s long-term strategy for improving competitiveness; (iii) the uses that the Club has historically made of revenue sharing receipts; and (iv) the overall financial position of the Club. Notwithstanding the above, if a Club’s Actual Club Payroll pursuant to Article XXIII(C) is equal to less than 125% of its revenue sharing receipts in a given Revenue Sharing Year, the Club shall have the burden of establishing in any Grievance that its use of revenue sharing receipts was consistent with this subparagraph 5(a). So, basically, teams that get revenue sharing money have to spend it in a way that convinces the player’s association that it’s actually funneling back down to the players. If they don’t, the commissioner has the power to make them reallocate their money in a way that both the commissioner’s office and the player’s association deem acceptable. It’s not an outlined minimum payroll like the NBA has, but for all intents and purposes, MLB does have a payroll floor. Trading Ricky Nolasco will not push the Marlins under that floor. They opened the season with a $36 million payroll, but also are financing $8 million of Heath Bell‘s salary with Arizona and agreed to pay $4 million to the Blue Jays as part of the Jose Reyes/Josh Johnson/Mark Buehrle sell-off. With those monies included in the calculation, the Marlins had nearly $50 million in player obligations for this season, so they weren’t pushing the lower limits of team payroll as they have in the past. But, the Nolasco trade absolutely has to raise questions about the Marlins priorities. In exchange for one of the better starting pitchers on the market, the Marlins chose cash savings over talent. In order to get the Dodgers to agree to take on the remainder of Nolasco’s 2013 salary — about $5.4 million in total — the Marlins agreed to take back three “warm bodies”, as Marc Hulet referred to the fringe prospects they got back from LA. In addition, the Marlins also sent $197,000 in international spending money to the Dodgers. So, not only did the Marlins choose to lower their current financial obligations in lieu of acquiring better players, they also included a portion of their allocation that was intended to help them develop prospects for the future. In other words, the Marlins traded both present and future talent just for the sole purpose of lowering their 2013 payroll. Under the new CBA, which limits the amounts teams can spend in both the draft and in international free agency, paying a player to pay for someone else is one of the few avenues left to essentially buy additional prospects. Teams that want to rebuild their farm system now have limited options, but paying a player’s salary after you trade him away is one way to essentially exchange cash for future talent. According to multiple published reports, the Marlins had the opportunity to do exactly that with Nolasco. Ken Rosenthal reported that the Rockies were willing to send “two quality prospects” to Miami for Nolasco, but they wanted the Marlins to pick up a good sized chunk of the money Nolasco was still owed. Instead, the Marlins took the Dodgers deal, which freed them of his salary but gave them minimal talent. The Marlins had a choice, and they chose current cash savings over future talent. It’s one thing to free up future salary, as they did when they traded Hanley Ramirez last summer, and even did so in the Blue Jays trade over the winter. A rebuilding club can make a legitimate case that removing higher salaried players from their books can aid in the process of putting a winning team back on the field, since those dollars will be available to be spent again on other players in the future. But the Marlins didn’t clear any 2014 salary in this trade, nor did they give themselves any financial flexibility to add additional players. All they did was reduce the amount of money that they’re going to have to spend on their roster this season, and then reduce the amount of money that they had to spend on international prospects as well. You’ll note that the last time the player’s association complained about the Marlins payroll, they entered into a three year agreement in raise payroll on an annual basis. That agreement covered the 2010 to 2012 seasons, and saw the Marlins sign Josh Johnson to a contract extension, add Javier Vazquez in free agency, and then go all out on their spending spree before last season. However, the 2013 season wasn’t covered in their agreement to increase payroll, and now the team has shed $60 million in commitments from last year to this year. With Nolasco out of the picture, the Marlins are now on the hook for about $12 million in payments to players on their roster for the rest of the season, plus the $6 million they’ve agreed to send to Arizona and Toronto. Given the amount of revenue sharing they receive and the size of the national television contracts that get disbursed evenly among the 30 clubs, they’re going to make a significant profit this season while putting one of the worst rosters on the field in recent history. The Marlins can point to the Astros — who have an even lower payroll and are just as lousy — all they want, but at least there’s evidence that Houston is trying to win eventually. When they traded away some of their international spending pool last week, they did it to get a 20-year-old prospect who is already in Double-A. The Cubs just agreed to pick up some of Scott Hairston‘s 2014 salary in order to acquire Ivan Pineyro, a 21-year-old pitching prospect with some potential. Other rebuilding clubs are using their financial positions to increase their talent base. In the Nolasco trade, the Marlins used talent to increase their financial position. It’s not against the rules, but the player’s association might argue that it violates the spirit of the rules. Or, perhaps, in the next CBA negotiations, they might just decide that it’s time to demand an actual minimum amount of expenditures from each team. Salary floors are problematic because you don’t want to force a rebuilding team to waste money on wins of low marginal value just to meet some predetermined standard of spending. However, now that MLB has pool allocations built into the amateur markets, perhaps it is time to establish a true minimum spending floor, utilizing both major league payroll and investment in future prospects in the calculation. Rather than saying that each team must spend $40 million (just to pick a number) on its Major League team, perhaps MLB and the player’s association could agree that $40 million would have to be invested into player acquisition, which would cover the big league team, the draft, and the international markets. Under that kind of system, you’d have to be prepare to invest heavily in the draft and international free agency if you wanted to run a $20-$30 million payroll. You’d have to be prepared to trade for additional international spending allocations, and perhaps in the next CBA, teams will be able to make similar kinds of trades to acquire draft spending money as well, since MLB’s goal is to eventually move to amateur spending into a draft process. With that kind of floor in place, dumping big league payroll would have to be offset by investments in talent elsewhere, and the incentive to simply dump salary in order to make a larger profit would be reduced. No system is going to be perfect, and overall, I don’t think MLB has a pervasive issue of teams making conscious decisions to choose profit over talent. However, the revenue sharing carrot doesn’t seem to work as well in Miami as it does in other cities. Maybe now, it’s time for the stick.
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