By Andrew Zimbalist
On Apr. 1, Major League Baseball kicked off its 2002 season without a collective bargaining agreement. The last time that happened was in 1994, and the results were disastrous. Will this year be any different? We asked noted sports economist Andrew Zimbalist. His predictions:
This season, the owners have pledged that they will not lock out players or unilaterally try to impose an agreement. The players, rather than striking as in 1994, are likely to take a decidedly different tack, too: decertify their union and sue the owners on antitrust grounds. They can do that because in 1998, Congress lifted MLB's antitrust exemption as it applies to collective bargaining.
How does the owners' behavior violate antimonopoly rules? First, to increase revenue sharing and, purportedly, promote competitive balance, the owners want to impose a nominal 50% tax on the net local revenue of each club (the net rate is 48.33%). The effective tax is actually much lower than that because teams get to hide substantial revenue from stadium and local-TV deals and also to liberally deduct expenses related to stadium operations. Yankees owner George Steinbrenner, for instance, is likely to pull in over $200 million from his YES network but reportedly will claim only $54 million as local-TV revenue.
For every dollar of extra revenue that a star player brings in, then, the team has to share 50% with other clubs. That makes a star 50% less valuable to the team. And guess what. Other things being equal, his salary offer will likely fall by about 50%. Although lower salaries may be a desirable outcome, that is nonetheless a restraint on free labor markets.
Second, Commissioner Bud Selig, after not enforcing the rule about one team providing another with financing when his Brewers got a loan from Minnesota Twins owner Carl Pohlad, has decided that he is going to enforce a different financing rule that has been honored in the breach in recent history. It states that a team's debt cannot exceed 40% of asset value. On the surface, the rule smacks of financial prudence, but the devil is in the details--two of them in particular.
Selig has declared that a team's asset value shall be set at two times annual revenue, adjusted for baseball's internal sharing. For instance, the Boston Red Sox in 2001 had adjusted revenue of $160.5 million, according to figures that Selig provided to Congress. By the Selig valuation rule, the Red Sox would be worth $321 million and allowed a debt of $128.4 million.
Yet the market tells us that the Red Sox--recently sold for $700 million--are worth much more. Even subtracting the value of the real estate and the 80% of the New England Sports Network that came with the team, the Red Sox would be worth as much as $500 million. In this range, the appropriate revenue multiple is around three, not two. And allowable debt would be in the neighborhood of $190 million, not $128.4 million.
The other detail is that teams must count long-term contracts as debt. (There's a strong irony here: When they file taxes, teams count them as amortizable assets.) For instance, in late 2000, the Red Sox signed outfielder Manny Ramirez to an eight-year, $160 million deal. As of June, when the Selig rule kicks in, the Red Sox will have a long-term obligation to Ramirez of about $120 million, which will be included in its allowable debt--plus about $66 million more in obligations to seven other players. It also had $40 million of preexisting debt that was assumed by the new owners, the John Henry group. So, even before Henry & Co.'s own financing of its purchase is counted, under the Selig rule, the Red Sox are over their debt (read salary) limit.
That means the team must apply for a short-term exemption. And then, for the remainder of 2002 and the next off-season, it will have no flexibility in its payroll. In practice, therefore, MLB is imposing a salary cap that was not collectively bargained, constituting a restraint of trade not subject to the nonstatutory labor exemption.
Then there is the matter of Major League Baseball's threat to ax two teams. Expect lawsuits from state attorneys general, prospective owners, and the players. In short, prognosticating about the baseball season is simple: mountains of litigation and the Yanks in seven. The writer is the Robert A. Woods Professor of Economics at Smith College in Northampton, Mass.