G. Copyright and disclaimers
A. Salary cap and tax plans
A1. What are the details of the new
agreement?
There will be a tax in 1997-1999, with no tax in 2000,
and a union option to extend the plan to 2001 in return
for a payment from the players and a reduction in playoff
money. The tax will be 35% in 1997 and 1998, and 34% in
1999. It will be imposed on the portion of payrolls over
$51M in 1997, $55M in 1998, and $58.9M in 1999. The tax
threshold will be halfway between the fifth-highest and
sixth-highest payrolls if that is higher; this means that
the tax will apply to at most five teams. The 1997 tax
threshold was $56.6M. There will also be a tax across the
board of 2.5% retroactively in 1996, and in 1997 as well.
The tax will initially be used to fund the shortfall
caused by the phase-in of revenue sharing; $10M was used
for this purpose in 1997, and the remaining $2M was
distributed among the five AL teams with the lowest net
local revenues.
A prediction of the effect of this tax at the time of
the proposal could be obtained by projecting that
payrolls would increase so that the average payroll
reached the 1994 (pre-strike) average of $40.7M from its
1996 opening-day value of $31.9M. This would put six
teams over $51M; if all of those teams were to treat $51M
as a cap, they would have to reduce total salaries by 4%
to reach that level.
All players will be credited with service time
(counting towards eligibility for arbitration, free
agency, and pensions) for the strike. Players who were
sent to the minors between July 28, 1994, when the strike
date was announced, and the beginning of the strike can
buy back the service time for the remainder of the 1994
season by returning the minor-league salaries they
received during the strike; 60 of 70 players affected did
so. In return, the union will not take any legal action
against the owners for actions such as unfair labor
practices during the strike.
Because the proposal was approved after the period for
free-agent signing began, a few last-minute details were
added. Two players who would have become free agents with
the added service time but who resigned with their
original teams were still considered signed; all other
affected players became free agents, and arbitration
offers for these players stood. Draft-pick compensation
for these new free agents will be with sandwich picks
between the first and second rounds instead of picks from
the signing team; this slightly increases their value to
new teams, as compensation for the shorter signing
period. The deadline for free agents to accept or reject
arbitration was delayed from December 19 to January 2.
Independently, the owners developed a new
revenue-sharing plan on March 21, 1996, which also
required the union's approval under the terms of the
injunction. All teams will share 22% of all local revenue
after deductions for certain expenses. Under the old
plan, cable revenue is shared at 25% in the NL and 20% in
the AL; ticket revenue is shared at 20% in the AL and
about 5% in the NL; and local TV revenue is not shared at
all. The plan will be phased in, with revenue shared at
60% of these levels in 1997, 80% in 1998, 85% in 1999,
and 100% after that. Current estimates are that the
shared revenue will be $70M in 1997, with some teams
giving $6M and others receiving $6M.
A2. What has happened as a consequence of
the agreement?
The John Olerud deal may have been a direct consquence
of the tax system. Olerud was making $6.5M, but the Blue
Jays apparently considered him worth much less. They
traded him away while agreeing to pay $5M of his salary.
As the tax rules are written, the Blue Jays did not have
to count this money for tax purposes; the trade thus
lowered their tax payroll by $6.5M but their actual
payroll by only $1.5M. Such trades have occurred in the
past, but the new system creates an incentive for
high-payroll teams to make these trades. Such trades can
either be used to get rid of overpaid players or to add
tax-free cash to a deal. There has been some discussion
about rewriting the rules to prevent such trades.
As an example of a possible trade of the second type,
suppose that the Blue Jays had believed that Olerud was
being fairly paid. They could have traded him for an
equally good Mets player who was making $1.5M because he
was young, and paid $5M of Olerud's salary to balance the
trade. The net result is that neither team's payroll
would change, and equal players would be traded, but the
Blue Jays would shift $5M of tax payroll to the Mets and
reduce their tax liability.
Since the tax is based on opening-day payrolls,
another effect is that teams have an incentive to defer
payroll increases until opening day. The Marlins and
Orioles reportedly did this, waiting to announce the
contract extensions for Gary Sheffield and Cal Ripken
until after opening day so that the extensions would not
count against the 1997 taxes.
The other consequences of the agreement depend on the
fact of an agreement, not on its details. The Dodgers
probably would not have been offered for sale without an
agreement; the existence of labor peace increases the
market value of the team. Interleague play, and some
licensing and marketing deals, were contingent on an
agreement.
A3. What is a salary cap? What was the
owners' proposal?
The owners' cap proposal has been withdrawn, but it's
still an important reference point in discussions of the
strike.
A salary cap is an agreement which places an upper
limit (and sometimes a lower limit) on the money each
team can spend on player salaries. The owners' proposal
was to limit each team's salaries to 50% of average team
revenues for the previous year; every team would be
required to have salaries between 84% and 110% of that
level. (Before the strike, the players got 58% of average
team revenues, according to the owners' methodology; the
actual reduction in salaries would be greater because
salaries of players on the 40-man roster and incidental
expenses such as meal money would be counted against the
cap.) The owners have dropped their demand that players'
licensing money be counted against the cap. There is
apparently no mechanism for enforcing the floor, although
a grievance could probably be filed with an arbitrator.
[Can anyone confirm this?]
The Congressional Research Service has analyzed this
proposal. If the cap had been in effect in 1994, it would
have reduced salaries by $198M. Of this total, only $38M
would be redistributed as shared revenue; the remainder
would be added to the profits of all teams.
A decision by an individual team to set a budget is
not a cap. Several teams did this, publicly announcing
their budgets, with no complaints of collusion.
For example, if the Tigers refuse to spend more than
$25M on salaries, they can do that under the old
agreement. If that means that they have $23M already
allocated and there is a player (either one of their own
players or a free agent who is interested in playing for
them) who wants $4M, they have to do without that player.
And if the Yankees think that the player is worth $4M to
them and are willing to pay that, he will become a
Yankee. The Tigers cannot do anything to stop this except
for going over their budget. They might decide to do
this; for example, if the player at stake is a hometown
hero, he could produce a lot of revenue for the Tigers.
A salary cap would force every team to have the same
budget. Thus, in the above example, say that the cap is
$25M. Now the Tigers cannot pay more than $2M for the
player. If the Yankees are already at or near the cap,
they cannot make a better offer; if he receives no better
offer, the player will probably sign with the Tigers for
$2M. If the Yankees have $3M or more free under the cap,
they can offer $3M to the player, and the Tigers will not
be allowed to match the offer; now the player will sign
with the Yankees at a reduced salary.
This is an essential feature of the salary cap; the
Yankees and Tigers have an agreement which affects what
the Yankees can pay for a Tigers player.
At one point in the negotiations, small-market owners
proposed a cap of $8.5M on scouting and player
development expenses. This plan would be similar in
principle to a salary cap, but acting on a different area
of spending. Since it would not directly affect salaries,
it might not need union approval. In that case, its
validity would depend on baseball's anti-trust exemption;
the best analogy in an industry would be if competing
companies agreed to limit advertising expenses.
A possible justification for this proposal would be to
prevent teams whose salary spending is limited by a tax
or cap from shifting their spending to other areas.
However, the effects would be more punitive, because some
teams, such as the Dodgers and Braves, spend far more
than the cap level; they would have to dismantle large
parts of their existing scouting networks. It would also
reduce the overall level of play, because players who
could not be scouted by baseball, or who had alternatives
to their reduced player-development contracts, would be
lost to the game. In addition, the money saved by
baseball would not all go to the owners; both sides in
the labor negotiations would be aware of the increased
profits due to reduced scouting expenses. As a result,
salaries would be likely to increase.
A4. What were the owners' tax plans?
Plans in both this and the next section are listed in
chronological order; the history of the final plan and of
its approval is at the end of this section. The specific
details of the plans were reported by the Associated
Press, and by the New York Times for the players'
February 7, 1996 plan. Details of some recent plans have
not been officially released.
The owners' first tax plan was proposed on November
17, 1994, before the imposition of the cap. The published
details were apparently incomplete; the following details
were worked by curve fitting with an Associated Press
chart. [Can someone fill in the correct formula?] It
would impose a tax on all payrolls above 112% of the
league average. The basic tax rate would be increased by
1% for every percentage point that overall salaries were
over the target level (eventually 50% of revenue, but
phased in over four years). The basic marginal tax rate
based on the August 1, 1996 salaries would be 72%; it
would increase by 4% for every $1M that a team was above
the threshold, and marginal tax rates would double, with
the 72% becoming 144% and the 4% becoming 8%, beyond $5M
above the payroll. [AP reported a much slower increasing
tax, with the basic rate of 4.64% in 1994, set to
generate $35M of revenue.]
This proposal would use the first $10M to form an
Industry Growth Fund. The rest of the revenue would be
distributed to clubs under the limit, in proportion to
their revenue; this would give such clubs an incentive to
increase revenue, and thus to sign players who would
increase it, but only if it left them under the limit.
There would be a very high cost for breaking the limit; a
team under the limit with average revenue would receive
$3M in tax distribution, while the same team would pay
$740K in tax for going $1M over the limit, and receive no
tax distributions. The limit would be an effective cap,
with the huge penalty for going over it, high tax rates
for teams over it, and tax rates of 200% or higher for
teams substantially over it. The proposal would also lose
some of the revenue-sharing effect of a tax; the Mets,
for example, had very high revenues but a below-average
payroll at the time of the proposal, and would thus get a
large share of the tax distribution.
On February 1, 1995, before Usery's plan, the owners
proposed a 75% tax on the portion of all payrolls over
$35M, and 100% on the portion over $42M. The tax would
have been used to help fund the players' pension plan,
but this would have the same effect as distributing the
money among themselves, since it would reduce their
obligation to fund the pension plan from other sources.
On March 4, 1995, the owners made a proposal which
they claimed to be based on Usery's plan, but which
included several proposals less favorable to the players.
The tax was 50% on all payrolls above the league average.
Unlike all previous proposals, including Usery's, this
would have no phase-in period. Arbitration awards would
be capped to no more than double a player's salary (with
players becoming eligible for the first time, such
increases are now very common), and it would then be
eliminated on Usery's schedule. The unrestricted free
agency in Usery's proposal would be replaced with
right-of-first-refusal for players with 4-5 years of
service.
The 100% threshold could not be treated as a cap by
all teams, but if all teams over the average in 1994 were
to go to the average, that would be a 10% cut in
salaries, with most teams paying $2M in tax. These plans
would probably lead to additional salary reduction from
the elimination of arbitration and from revenue sharing.
(If revenue sharing reduces salaries across the board,
this would be completely cumulative with the salary
reduction from a tax linked to the average salary, but it
would reduce the effect of a tax linked to a hard-dollar
limit or to revenues.)
On March 27, 1995, just after the NLRB requested an
injunction, the owners made a proposal including a 50%
tax on all payrolls above $44M, effective in 1996 and
continuing until the CBA expires in 2000. There would
also be a salary floor of $29M. If this had been in
effect in 1994 and teams had treated the $44M limit as a
cap, it would have resulted in a 4% decrease in salaries;
the effect in future years would be different if salaries
went up or down. It would also include the Fort
Lauderdale plan. Players would have unrestricted free
agency after six years; the owners were willing to offer
either the current system of arbitration, or else their
previous offers of first-refusal free agency after four
years. One other change is that teams would receive
draft-pick compensation (by the current formula) for all
free agents lost; under the current CBA, the team must
offer arbitration in order to get the compensation.
The owners' next proposal, offered on November 15,
1995, included a tax ranging from 25% to 50% on payrolls
above $44M. If revenues exceeded $2.2B, the limit would
be raised to 2% of total revenues, which would be 56% of
average team revenues now, and 60% after the next
expansion. The tax would be cancelled if salaries fell
below 50% of revenues. This tax would have affected five
teams in 1995. On February 21, 1996, the owners accepted
the players 2.5% tax offer for 1995, with options in 1997
of either a 5% tax across the board or the 25% tax on
payrolls over $44M from the previous proposal.
On March 21, 1996, the owners made a plan which was
characterized as a significant step forward. The tax rate
was 2.5% across the board in 1996, and lowered from
previous proposals to 3.5% across the board in 1997, 40%
on the portion of payrolls above $46M in 1998, and the
same 40% in future years with the threshold increasing by
7% for each year. This plan also eliminated several other
demands. For example, the owners offered to retain the
current rules for salary arbitration, instead of
eliminating it for all third-year players.
The owners' last formal proposal before the final
agreement, offered on May 23, 1996, accepts the players
2.5% tax offer for 1996, with a 3.5% tax for 1997, and a
39.5% tax on payrolls above $46M in 1998, increasing by
7% for each subsequent year, but no tax in the last year
of a five-year or six-year plan. Four teams were over
this threshold on opening day in 1996, but more teams
will probably be affected as revenues and salaries
recover from the effects of the strike. Projecting 1996
payrolls to 1994 levels would put ten teams over $46M; if
all of those teams were to treat $46M as a cap, they
would have to reduce total salaries by 9% to reach that
level. The tax will be used to provide some of the
revenue-sharing money.
This proposal made another important concession,
eliminating the tax in the last year of the plan. This is
important because the last year of the expired agreement
would remain in effect until a new plan was approved;
this could have an effect on bargaining in the next CBA.
Negotiators from both sides agreed to the current
proposal on August 11, 1996, and formally approved it on
October 24; there were several informal proposals from
both sides in the bargaining which preceded this
proposal. The owners rejected this proposal on November
6, 1996. The official vote was 18-12 to reject, but the
New York Times reported that 16 owners actually favored
it, with four changing their votes as a show of
solidarity once its defeat was certain. (The owners had
previously agreed to require a 3/4 vote for approval of
any contract.)
The main sticking point appeared to be service time.
The union wanted all players to be credited with service
time for the strike, in return for its offer to drop all
litigation. This proposal was accepted by the owners'
negotiator, but the owners themselves were unable to
approve it, with negative votes coming from owners whose
stars would be eligible for free agency under this plan,
who wanted more concessions, or who were determined to
break the union.
The union submitted the proposal to the players for
approval before the World Series, and the players
approved it; this gave authorization to the owners to
approve the proposal and put it into effect, even though
the players might be unreachable when the owners approved
it. However, any significant changes would require player
approval; therefore, the owners who rejected the proposal
and asked for such changes in November could not have
obtained them until 1997, if at all.
A counterproposal to grant service time to all but the
19 players who would become eligible for free agency
because of the time was rejected by the union. These
players were allowed to file provisionally for free
agency, with the filing valid only if there was a deal
granting service time; they were granted free agency with
the new agreement.
The owners approved the agreement on November 26,
1996, by a 26-4 vote. Many owners were angry at White Sox
owner Jerry Reinsdorf, who had led the movement for
tighter salary control which caused the deal to be
rejected. He then signed Albert Belle for $10M a year,
creating the appearance that he had opposed the deal for
his own interests, because he would have had to pay a tax
on Belle's salary, and would have lost Alex Fernandez to
free agency. Reinsdorf voted against the deal, but acting
commissioner Bud Selig led the support for the vote as he
had led the opposition before. The union approved this
plan on December 5, 1996. The final agreement was signed
on March 14, 1997, bringing an official end to the
negotiations.
Independently, the owners developed their new
revenue-sharing plan on March 21, 1996, which also
requires the union's approval under the terms of the
injunction; this plan will take effect as part of the new
agreement. Interleague play, which was also contingent on
the agreement, was approved for 1997 and 1998 in the same
meeting which approved the final plan.
A5. What were the players' tax plans?
Negotiators on both sides agreed to the final
proposal; the players, as well as the owners, made
several informal proposals in the preceding two weeks on
the way to this deal.
The players' first tax proposal, offered on September
8, 1994, was a 1.5% tax on the top 16 payrolls and
revenues, with the money to be distributed to the bottom
teams in each category. The next proposal, in November
1994, was a 5% tax on all payrolls with increased rates
on very high payrolls. A new proposal with similar
effects was offered in on February 4, 1995, when the
owners withdrew the imposed cap. It includes separate
taxes on revenues and on payrolls. The 15 clubs with the
lowest revenue would receive revenue-sharing money, and
would be subject to a 3.7% tax on their revenues. The
other clubs would pay a payroll tax of 5% on the portion
of the payroll between 50% and 130% of the average
payroll, 15% on the portion between 130% and 160% (this
would have affected only three teams in 1994), and 25% on
the portion over 160% (this would not have affected
anyone). The marginal tax rate would thus be 3.7% for
low-revenue teams, 5% for most high-revenue teams, and
15% for high-payroll, high-revenue teams.
The players made another proposal on March 4, 1995.
The primary change in this proposal was that it accepted
the owners' Fort Lauderdale Plan for revenue sharing. A
25% tax would also be imposed on payrolls over 133% of
the league average. Only one team was over the 133% level
in 1994, although two others were very close. The tax
would thus have a trivial effect on salaries, although it
would discourage teams from extremely high spending. The
Fort Lauderdale plan alone has been estimated to cause a
5% decrease in salaries; the effect would be cumulative
with the luxury tax based on the league-average payrolls.
On March 30, 1995, the players proposed to accept the
Fort Lauderdale plan with a 25% tax on the portion of
payrolls over $50M. If this plan had been in effect in
1994, it would have had only a slight effect on salaries;
if all teams had treated the $50M limit as a cap, six
teams would have reduced their payrolls, by a total of
less than 2%. The reduction might drop to zero or
increase considerably, depending on what happens to
salaries; reports say that the tax threshold would vary
with industry revenues, keeping its effect closer to
constant.
The players' next proposal, offered on February 7,
1996. apparently included a 25% tax on the portion of
payrolls over $50M; another report said that the
threshold would be 123% of the previous year's average,
which would be $40M based on the 1995 average of $32.5M
but is likely to be about $50M once salaries recover from
the effects of the strike. It also included the Fort
Lauderdale plan.
The players' most recent formal proposal, offered on
March 8, 1996, includes a 2.5% tax across the board for
the first three years of the proposal, then a 30% tax on
the portion of payrolls above a certain threshold, likely
to be between $50M and $52M depending on industry
revenue. The tax would be used for revenue sharing and an
industry growth fund. Projecting 1996 salaries to 1994
levels would put six teams over $51M. If all teams
treated $51M as a cap, salaries would decrease by 4%; the
actual decrease would probably be less because the tax
rate is low enough that contending teams might find it
worthwhile to go over the threshold. This proposal also
includes the owners' Fort Lauderdale revenue-sharing
plan.
A6. What are the general effects of a tax
or of revenue sharing?
A very high tax rate, as in the owners' earlier tax
plans, would have the same effect as a cap. Consider the
example in the section on the cap, but now assume that
the Tigers are over the limit and subject to a 100% tax
rate on any increase in their payroll. Thus, if the
Tigers want to sign the player for $2M, they would pay an
additional $2M in tax, for a total cost of $4M to make an
offer of $2M. Meanwhile, if the Yankees are under the
limit, they could offer $3M to the player at a cost of
only $3M to the team. This would make it almost
impossible for teams which are in the high tax range to
compete for free agents, but not completely impossible as
a cap would. If the Tigers really want to keep the
player, they can offer $4M and pay an extra $4M in tax,
but they would expect to lose a lot of money by doing
this.
A lower tax rate will reduce salaries but not prevent
teams over the limit from competing. For example, if the
tax rate were 11% rather than 100%, the Tigers could
offer $3.6M (paying taxes of $396K) for a player worth
$4M. This would reduce the player's value to the Tigers
by 10%. He might accept that offer to stay with the
Tigers, either for non-economic reasons or because no
team offered the $4M.
If the tax money is redistributed to small-payroll
owners, or the tax is imposed on small-payroll owners and
redistributed evenly, it may have the same effect on
them. For example, if the Yankees are under the tax limit
and will get 11% of the difference between their payroll
and the league average, they will lose $396K in tax
receipts if they sign the player for $3.6M. In this case,
the player's value to the Yankees is also reduced by 10%.
If every player's value to every team is reduced by 10%,
salaries should drop by 10% across the board, and owners'
profits should increase by the amount that salaries drop.
The effect on the players of a tax on revenue, or of
revenue sharing, would be similar. If the Tigers pay a
10% tax on revenue or must share 10% of their revenue,
then the player who adds $4M in revenue is only worth
$3.6M, because the Tigers don't get to keep the other
$400K. (The effect on the owners would be different,
because owners with high revenues would pay a higher
fixed sum with a tax on revenues than with a tax on
payrolls. The revenue-tax plan would do more to help
low-revenue teams make a profit and reduce high-revenue
teams' profits.) This is why the players offered much
lower payroll taxes in their plans which included the
Fort Lauderdale agreement.
Note that the effect of all of these proposals depends
on the *marginal* tax rate. The players' and owners'
early tax proposals might raise the same amount of
revenue, but the players would do it with marginal tax
rates of about 5% (and thus a 5% depression in salaries),
while the owners would do it with a marginal rate of 75%
or more on teams over the limit, which would make it
unlikely for teams to go significantly above it and would
thus depress payrolls to approximately that level. The
owners' pre-strike tax plan put a very high cost for
exceeding its limit, and higher marginal tax rates for
teams exceeding the limit. That is the fundamental
difference between the players' and owners' older tax
plans. The difference in thresholds became the primary
issue with the March 1995 plans; the phase-in date of the
luxury tax was another sticking point.
A7. What was Usery's plan, and why did
the players reject it?
The plan which became public on February 7, 1995
apparently was not the final recommendation which Usery
had been told to give, but a proposal which was leaked to
the press. This helps to explain why it contains
provisions which had never been under discussion, and
also other factors which has been inadequately studied.
The plan would impose a tax on the portion of payrolls
over $40M; the tax would be 25% in 1996, increasing to
50% in 1998. The plan did not include any proposal for
what would be done with the tax money, nor an estimate of
the amount raised.
Players would be eligible for unrestricted free agency
after four seasons, instead of the current six.
Arbitration would be retained under the old rules for two
years (except that it would not be available to
free-agent eligible players), then eliminated. Players
who would become eligible for free agency or arbitration
if credited with 52 days of service time for the strike
would not be credited with it; all other players would.
The plan also made two other concessions to the owners
which had never been discussed. The owners would be
allowed to use money designated for the pension plan for
other purposes if the plan was overfunded; this has not
been allowed since the 1972 strike. Also, the players'
share of post-season ticket money would be reduced by
25%.
The players saw this plan as unnecessarily favorable
to the owners. The 50% tax rate, which would affect more
than half the teams in 1994, not even allowing for
inflation or possibly increased revenues in the future,
would create an effective cap; teams over the limit would
offer free agents only 2/3 of their value. The concession
to the players on free agency is less valuable with a cap
that without one; if there is a limited amount of money
available, allowing more free agents will simply
redistribute the money. And the other concessions to the
owners would be important issues. If the owners had been
able to take any surplus out of the pension plan, the
skipped pension payment on August 1, 1994 would have
given them much more bargaining leverage, as it would
have threatened the pensions of retired players.
A8. Do salary caps exist in other
industries than professional sports?
In general, they don't. Many individual companies
budget their salaries, but that is not a cap. For
example, Chrysler can decide how much it will pay
welders, and negotiate welders' wages with the United
Auto Workers. However, Chrysler cannot force Ford or
Toyota to go along; if Toyota wants to offer more when
its labor contract comes up for renewal, or Ford wants to
offer less and can get UAW to agree (possibly with some
other changes, such as better benefits), that deal will
stand. And if Toyota's higher wages mean that the best
workers choose to fill the jobs at Toyota instead of
going to Chrysler, that is allowed to happen.
It would be a salary cap if all automakers agreed to
pay X wage for a welder with Y years of experience, and
forced UAW to accept the offer from all of them or not at
all.
Effective salary caps may exist when there is a
monopoly; however, almost all monopolies are either owned
or regulated by the government. For example, until the
alternative telephone companies opened, there was a fixed
salary scale for telephone operators. Nobody could offer
them a higher wage than AT&T because nobody else
could hire them.
A9. What has the effect of the salary cap
been in the NBA and the NFL?
[I'm not a fan of either sport; more information would
be welcome here.]
When the NBA instituted a cap, the league was in
financial trouble; four teams were on the brink of
bankruptcy and most of the others were in trouble. The
owners opened their books to the players to prove this.
The teams and union agreed to a cap of salaries at 53% of
revenues, which was reportedly higher than the 50% that
the players had earned the previous year. The cap level
has now been raised to 59%; there are also ongoing
disputes about how to allocate certain types of revenue.
This was a soft cap, allowing teams to go over the cap
to sign their own free agents. As a result, several teams
have found that they can attract free agents despite
being over the cap, by signing them to artificially low
one-year contracts and then retaining them for later
years at market value. Other teams have gone well over
the cap by drafting their players, and then paying market
value to retain them. In 1993-1994, all but one of the
teams were over the cap.
The new negotiated CBA includes a slightly harder cap.
Rookies' salaries are strictly capped, with contracts
limited to three years; thus the reduction of the draft
to one round in 1998 will not significantly increase the
salaries of undrafted rookies. The cap is based on
players receiving 59% of defined revenues. They may
actually receive more, because teams over the cap will be
allowed to double the salary of a player who is returning
to the same team after two years, use half the salary of
an injured player to sign a replacement, and spend $1M on
free agents. The proposed luxury tax has been eliminated;
however, if salaries exceed an undisclosed percentage of
revenues after three years, the owners have the right to
reopen the CBA or reduce the cap by $500K per team. The
result is still not a hard cap; at last report, 17 of 29
teams were over it.
With no CBA and the no-strike, no-lockout pledge
expired, the NBA owners imposed a lockout on July 1,
1995. Dissent among players and agents led to a call for
an election to decertify the union. However, this move
failed, the CBA was approved by the players, and the
season started on time.
The Celtics and Lakers dominated the NBA in the 1980's
as much as they had with no cap in the 1960's, by
drafting excellent players and then keeping the teams
together. Competitive balance has been much better in the
1990's, with a variety of teams, including small markets,
in contention.
In the NFL, the NFLPA and the owners agreed to a
seven-year contract starting in 1993 after Judge Doty
ruled that the owners' Plan B free agency (teams
protected 37 players each year and the rest could move)
was illegal. The CBA indicated that if players' salaries
were 67% of revenues (luxury box revenue was not included
in these totals), then a hard salary cap would be put in
place until player revenue was only 64%. In 1993, this
resulted in some players moving from one team to another
as free agents (the first true case of unrestricted free
agency in the NFL, since teams would previously lose two
first-round picks for signing marquee players as free
agents), the 67% mark was easily reached and the cap
invoked. A rookie salary cap was also instituted to
discourage rookie holdouts.
The NFL has played only three years with a cap, so the
long-term effects are not yet clear. There have been
several visible short-term effects. High-salaried
veterans on non-championship teams, such as Phil Simms,
have been cut to make room under the cap for signing
lower-priced players. (This wouldn't happen with
guaranteed contracts, which exist in both baseball and
basketball; salaries paid to released players still
counted against the NBA's salary cap.) Also, in the
latest expansion draft, high-salaried players were left
unprotected, and the expansion teams picked up very few
of them, because they wanted to save the salary slots for
free agents.
Also, the cap discourages teams from stockpiling
replacements for potential injured players; it doesn't
make good economic sense to pay a player to sit on the
bench in case the quarterback is hurt. This isn't an
issue in baseball, because bench players on the roster
get into a lot of games, while other replacements come
from AAA and wouldn't count against a cap. With the
frequency of injuries in the NFL, there might be a
problem for teams near the cap who need to sign new
players to replace injured players, but such problems
haven't been reported.
While the NFL has a hard cap, teams have gotten around
it by signing players to contracts with large signing
bonuses before the cap was imposed, or backloading
contracts to a point far enough in the future that they
expect that either they will either be under the cap or
the cap will no longer be in effect. Bonuses which are
not expected to be earned may not be counted against the
cap; if they are earned, they are pushed to the next
year's cap. Signing bonuses are prorated over the length
of a contract even if the contract is not guaranteed;
this allows effective frontloading of contracts. In 1995,
26 of 30 teams were over the cap.
Another effect of the lack of guaranteed contracts is
that teams can force players to take salary cuts in order
to allow the teem to meet the cap. If the player refuses,
the team can release him with no obligation to pay the
remainder of his contract; therefore, the player must
accept the cut or try to go somewhere else. (This could
not happen in baseball; a player can be released in
mid-contract for lack of skill but not for economic
reasons. A baseball team which asked a player to take a
pay cut in mid-contract and then released the player when
he refused would probably be ordered by an arbitrator to
pay the rest of the contract.)
The release of many players for cap reasons has
angered many veterans. While the players did approve the
CBA with the cap proposal, many feel that the NFLPA did
not adequately explain the proposal. Some veterans also
feel that the NFLPA was so concerned about free agency to
accept a proposal which had the effect of making many
older players lose their jobs.
One of the arguments which some owners raised against
the Rams' move to St. Louis was that it would have
increased the league's total revenues and thus raised the
cap. Some of the owners asked for compensation. (There
were also a variety of non-cap-related reasons to oppose
the move as well; it probably would have been opposed
even without the cap.) The move was later approved after
the Rams agreed to make a higher payment to the league
for compensation.
A10. What does a salary cap have to do
with revenue sharing?
There is no fundamental relationship. The reason they
are tied together is that the baseball owners want them
tied together. Large-market owners will lose money from
revenue sharing, and thus have no reason to accept it in
isolation. Thus their acceptance of revenue sharing was
contingent on the passage of a salary cap, which will
guarantee their own profits, and force small-market
owners to spend the increased revenue rather than
pocketing it.
The owners' first tax plan eliminates the floor, and
thus does not satisfy this last condition; however, the
distribution of taxes in proportion to the revenues of
low-payroll teams creates a (very slight) incentive for
these teams to spend money on increasing revenues. The
owners' newer tax plans do not even do this; the only
incentive they give for low-payroll teams to spend more
money is by decreasing salaries.
If revenue sharing has the same effect as a tax in
lowering salaries, as economics predicts it should and
both sides have admitted it would in negotiations, then
revenue sharing alone could reduce salaries to a level at
which the cap is no longer necessary, even if a cap is
necessary at the current level.
B. Anti-trust exemption
B1. Why does baseball have an anti-trust
exemption?
It is not written into the law; it is the result of a
Supreme Court decision.
The Federal League, which played as a rival major
league in 1914-1915, filed an anti-trust suit against
MLB. In 1922, the Supreme Court ruled for MLB, on the
basis that MLB was not interstate commerce and thus was
not subject to federal anti-trust laws.
In later rulings, the Supreme Court has called the
1922 decision "an anomaly", but has let it
stand as a precedent, saying that it is Congress's
responsibility to overturn the exemption. Bills to
overturn the exemption have frequently been introduced in
Congress, but they did not make it out of committee. The
Court's interpretation of this action was that Congress
intends to keep the exemption.
In the new agreement, players and owners have agreed
to ask Congress to overturn the anti-trust exemption with
respect to labor relations. Congress attempted to pass
such a bill during the strike; it passed the Senate
committee but got no further. Another attempt has now
passed the Senate committee.
B2. Are other sports also exempt?
They are not legally exempt; the Supreme Court has
ruled that the 1922 decision applies only to baseball.
However, it is legal to agree to terms in a labor
contract which would normally be in violation of
anti-trust law, provided that the contract was obtained
in fair collective bargaining. For example, if the
anti-trust exemption were repealed, MLB and the players'
union could still agree to maintain the current system of
free agency and arbitration. However, it might not be
binding on minor-league players, who are not union
members. [Zimbalist claims that it wouldn't be; do any
labor experts have an opinion? The NFL and NBA don't have
this problem because there are no minor leagues.]
By act of Congress, all sports leagues are exempt from
anti-trust in their negotiation of national broadcasting
contracts. This allows the leagues to negotiate internal
restrictions, such as baseball's rule that The Baseball
Network has exclusive rights to all games on its date.
Such an arrangement would also be legal in the NFL or
NBA; an NBA restriction on superstation broadcasts was
upheld by the Seventh Circuit in September 1996.
B3. What are the effects of the
anti-trust exemption?
It allows the owners to create exclusive deals, even
when they are anti-competitive measures. The right to
such deals could also hurt a rival league (although it
might not matter; the USFL won $1 in damages in an
anti-trust case). MLB could sign a contract with ESPN
which allowed ESPN to broadcast a certain number of its
own baseball games, and no games from any other league
during the MLB season. The rival league would then be
unable to negotiate with ESPN.
The effects may be tested in George Steinbrenner's
current suit against MLB. Steinbrenner signed his own
licensing deal with Adidas; MLB argues that this deal
violates the major-league agreement in which MLB as a
whole negotiates licensing deals. Steinbrenner is suing
MLB on anti-trust grounds; the exemption may be held to
protect MLB and force Steinbrenner to cancel his contract
or share an agreed amount with other teams. (Jerry Jones,
of the Dallas Cowboys, made a similar deal in the NFL,
and the league didn't try to block it.)
The owners are also claiming that their reserve rules
are protected by anti-trust law. That is, players who do
not have signed contracts but were not eligible for free
agency under the expired CBA may not sign with teams in a
rival league; MLB can claim that the players are still
under contract. Blacklisting players who move to the
rival league would also be possible. For example, in the
1950's, several players signed with the new Mexican
League. The Commissioner barred any Mexican League
players from playing for MLB for five years, and this was
upheld by the courts.
The minor-league agreements might also be forbidden by
anti-trust law, because they bind a player who is not a
member of the union to a single team's minor-league
system.
An agreement which would normally be in violation of
anti-trust law is allowed if it is reached in collective
bargaining with a union. The NBA's salary cap was
recently upheld in court because it was reached in such
an agreement. (If the cap is imposed after a failure to
negotiate in good faith, it is forbidden by labor law
rather than anti-trust law.) A June 1996 Supreme Court
decision affirmed this principle; a union cannot file an
anti-trust suit on behalf of its members.
However, anti-trust law may still have an effect on
labor relations. The NFL players decertified the union in
1987, which removed the labor exception and allowed the
players to sue the NFL under anti-trust. The baseball
players could have done the same to overturn the imposed
cap if anti-trust law were imposed; the union and owners
have agreed to lobby Congress to overturn it with respect
to labor relations.
Collusion would be forbidden by the anti-trust laws if
they applied to baseball; instead, it is officially
forbidden by the collective bargaining agreement. When
the owners colluded in the free-agent market in
1985-1987, they paid their penalty under the terms of the
CBA, which limited the penalty to the actual damages. If
the players' union had been able to sue under anti-trust
law, the damages would have been tripled. (The current
CBA specifies triple damages for collusion.)
C. Other economic issues
C1. What effect would X have on ticket
prices?
The answer to this question is usually
"none", regardless of X. Most commonly, X is
something like "higher salaries" or "a
smaller TV contract"; in these cases,
"none" is correct.
Baseball owners, like most business owners, are
interested in maximizing profits or minimizing losses.
Thus they set ticket prices with that goal in mind. Since
having an additional fan attend the game does not have
much effect on the cost of holding a game, this means
that prices are set to maximize revenues.
For example, if there are two million fans willing to
pay $10 to see the game, but only 1.6 million willing to
pay $12, then it would not be a good economic decision to
raise ticket prices from $10 to $12, because it will
decrease revenues and profits. But suppose instead that
there are 1.7 million willing to pay $12. In that case,
ticket prices will be raised to $12, because the increase
will generate an extra $400,000 of revenue.
Now, suppose something happens which affects the
team's profit, without affecting the number of fans who
want to attend games at any given ticket price. For
example, the team could get less money from a new TV
deal, or could have its payroll increase as several good
young players became eligible for arbitration and others
were kept as free agents, or the owner could lose money
when one of his other businesses went bankrupt. The
ticket price which maximizes revenue would not change, so
the owner would continue to charge the same price, but
make a lower profit.
When would a change affect ticket prices? Only if it
affected the demand for tickets. This might happen if the
team was improved by signing free agents; however, the
teams which lost those free agents would have the
opposite effect, so this would not cause ticket prices to
change on a league-wide basis. The opening of a new
stadium, or improvements in an existing stadium, might
result in higher ticket prices for a better product. The
end of a recession in the city would increase disposable
income, and thus might increase the optimal ticket price.
Even in these cases, it isn't clear that ticket prices
will go up. If the change means that 20% more people are
willing to buy tickets at any price, then revenue for a
fixed price will go up by 20%, so the optimal price won't
change; however, revenues and thus profits will increase.
However, there is a current trend which may cause
prices to go up. In some cities, the team is so popular
that the park sells out regularly. If the team becomes
more popular, demand will go up at a constant ticket
price, but revenue will not go up with demand because
some people who want to buy tickets cannot get them.
(Some of the extra revenue will be collected by ticket
agencies and scalpers instead of the team, since there
are people who do not have tickets but who are willing to
pay more than the ticket prices.) Thus these teams will
have to increase ticket prices to maximize revenue, even
if demand goes up by the same constant factor at all
prices.
C2. Have ticket prices gone up?
Not in real dollars. A study in Baseball and
Billions, by Andrew Zimbalist, compares average
ticket prices to the cost of living since 1950. There are
minor fluctuations (adjusted prices were highest in 1970
by a small amount), but they have been essentially
constant over time. More recent data tends to confirm
this trend; adjusted prices are slightly higher now than
in 1980, but still lower than in 1970. There does seem to
be a tendency for ticket prices in a city to increase
when the quality of the product increases because of a
modern ballpark. The new parks had significantly higher
ticket prices when the opened than the old parks in the
same cities did in the previous year. The highest ticket
prices are at the new parks, and three big-city classic
parks (Yankee, Fenway, and Wrigley). (These are also the
parks which sell out most frequently.)
You will often see comparisons which say, "It
costs a family of four $100 to attend a game today,"
along with some ticket price from the past. This
comparison is meaningless unless it is adjusted both for
inflation and for the difference between what is being
purchased. If the tickets alone cost $12 thirty years ago
and $50 now, the price has not increased in real value;
the family which now makes $50,000 probably would have
made only $12,000 back then in similar jobs, and now pays
$1000 monthly to rent an apartment which rented for $240
then.
C3. Why do players make so much? What is
the market value of a player?
The value of a player to his team is his marginal
revenue; this is the amount of revenue which the team
makes with him but would not make without him. If he is a
good player, his team will win more games if he plays for
them, and will thus sell more tickets, collect more from
concessions, get more TV viewers, and have a better
chance at World Series money. If he has extra drawing
power as an individual, he will also help sell more
tickets. All of these may be worth a lot of money to the
team. If the team expects the player to be worth $4M in
additional revenue, it should be willing to pay the
player up to $4M, since it will make a profit on the
deal; if he asks for more than that, it should let him
go.
For baseball players, such a high value is reasonable.
A study in Baseball and Billions estimates
that the value of an extra win to a team in 1984-1989 was
$400,000, independent of the team's market size.
Projecting this to the revenues which owners expected in
1994 without a strike, that would be $1M, which means
that a player worth five extra wins (typical for a
superstar) would generate $5M in extra revenue. Projected
1997 revenues are about the same, and thus suggest the
same current value for a win.
The market value of a player is what he would earn if
there were open competitive bidding for his services. In
theory, this should be the expected value of the player
to the team for which he has the second-highest expected
value, since the team for which he is most valuable can
offer that amount and nobody will beat it. This would be
the player's actual salary in a free market.
Players who are not subject to a free market may not
make their expected marginal value. Players who aren't
eligible for arbitration usually make much less, because
they have very little option. Players who are eligible
for arbitration still tend to make less than their
marginal value (see below). Players who are under
long-term contracts may make more or less than their
marginal value in one particular year; however, when the
contract was offered, it was probably offered for the
expected value or less, and both sides are now taking the
risk. If a team misjudges expected values and signs
players for more than their value, it should pay for its
bad business decisions.
The same principles apply to any worker who is free to
market his or her services. If employers X, Y, and Z all
believe that you will generate $30,000 in additional
revenue if they hire you, then all three will be willing
to match each other's salary offers if they are under
that level. If Z is stupid enough to offer you $35,000,
you'll take the offer, and if Z makes too many of these
mistakes, its profits will drop, and its executives will
lose their jobs or the company will go bankrupt. If Z
offers you $35,000 because it believes you are worth
$40,000, and it turns out to be right, its profits will
go up, and if Z makes more of these good deals, X and Y
will be in trouble.
C4. How are salaries determined for
players who have X years of service?
Players with less than two years of service, and the
83% of players with the lowest service time among
third-year players, have no negotiating rights with their
teams. The teams can offer whatever they want, subject
only to the minimum salary. The players' only leverage is
to refuse to sign any contract at all; they may not
attempt to negotiate with another team. Such players
often don't get just the minimum salary, partly because
of the team's interest in maintaining good will; paying a
player $300,000 instead of $109,000 for $1M worth of
production is still a good deal, and may make the player
more likely to stay for below market value when he
becomes a free agent.
The top 17% of third-year players, and all players
with at least three years of service, are eligible for
arbitration. They may still negotiate with their teams
for salaries. However, their teams cannot force them to
accept an offer or go without a job. If a player and his
team cannot agree on a salary, the team may choose to
release the player or offer arbitration. The player
cannot force the team to offer arbitration. If the team
releases the player, he becomes a free agent, his old
team may not negotiate with him until May 1, and the team
which released him is not entitled to any compensation.
A player with less than six years of service must
accept arbitration; a player with six years or more may
refuse arbitration and become a free agent. The repeater
rights rule in the old CBA, requiring a player who had
changed teams as a Type A or B free agent in the previous
four years to accept arbitration, has now been
eliminated. If he signs with another team, the team which
signs him may have to give a draft pick as compensation
to the team which lost him; this depends on a complicated
formula for Type A, B, and C free agents. Except for the
compensation, this is essentially a free-market
negotiation. The player can demand X years for Y million
dollars, but he won't get it unless at least one owner
thinks he is worth that much.
A player in the middle of a long-team contract can ask
to renegotiate the contract. However, the team is under
no obligation to renegotiate; it can require the player
to fulfill the previous contract. The team might agree to
renegotiation in the interest of good will, hoping to
retain the player when the contract expires. This rarely
happens, but it has happened occasionally. An important
example is Rickey Henderson, who signed an artificially
low contract because of collusion, and wanted to
renegotiate for his fair market value after the collusion
had been exposed.
The players have offered to eliminate arbitration, in
return for granting free agency to the players who would
otherwise be eligible for it. This would not be a
significant concession (arbitration probably produces
lower salaries than free agency would), but it does get
arbitration off the table. This would allow any owner to
set a budget and guarantee that he could stick to it.
Under the owners' proposals before the March 27, 1995
proposal, and as an option in the March 27 proposal,
arbitration is eliminated. Players with less that four
years of service have no negotiating rights other than
the minimum, which is an escalating scale depending on
service time. Players with 4-5 years are free agents, but
their team has the right of first refusal. To exercise
this right, the team must make a qualifying offer of 110%
of the player's salary in the previous year; it then has
the right to match any offer made by any other team and
retain the player. If the team does not make a qualifying
offer, it loses the player with no compensation. Players
with six years are unrestricted free agents. The team
must make a qualifying offer of 100% of the player's
salary in the previous year to get compensation and
retain the right to negotiate with the player.
How well right-of-first-refusal free agency will work
is unclear. If teams are as willing to bid on restricted
free agents as on unrestricted ones, their salaries would
go up to their market value, and they would stay with
their original team only if that team were willing to
match the market value. This would probably happen for
free agents for whom it is believed that their original
team has no intention of keeping them; other teams would
treat such players as unrestricted free agents. However,
if it is known that a team wants to keep a restricted
free agent, other teams are less likely to spend efforts
bidding on the player, since he may not be available.
Under the imposed cap, some teams publicly announced that
they would match any offers, possibly hoping to
discourage any other team from making an offer which
would serve only to bid up the player's price. These
players would wind up with below-market salaries,
although probably not far below their market value as
long as some teams were willing to bid.
C5. How does arbitration work? Does it
force teams to overpay for players?
The arbitration procedure was added to a previous CBA
at the request of the owners; it has been modified in the
new CBA.
Arbitrators are members of the American Arbitration
Association. Any member of the AAA may volunteer to be in
the "pool" of arbitrators eligible to hear
baseball cases. Lists of volunteers are examined by
representatives of the players and the owners; an
arbitrator must be approved by both groups to be in the
pool. (This discourages arbitrators from appearing biased
for either side; such arbitrators will be dropped from
the pool.) The arbitrator for an individual case is
chosen at random from the pool. Under the new CBA, cases
will be heard by three-person panels, with one impartial
arbitrator as above, and one arbitrator chosen by each
side; this will be phased in over the first three years.
Arbitration can be offered only by the team; a player
cannot force his team to offer arbitration, although he
can refuse an offer of arbitration if he is eligible for
free agency. The player and the team submit their
proposed salaries to an arbitrator, and present their
cases. The CBA specifies that team finances may not be
considered in arbitration (although attendance can be);
in the new CBA, this principle has been extended to
exclude the luxury tax from consideration, so that
players do not have their arbitration salaries reduced
because the team's payroll causes a tax to be imposed.
The arbitrator must choose one figure or the other; this
discourages unreasonable demands from either side.
Contracts awarded in arbitration are always for one year,
with no incentive clauses. However, the team and player
may settle on some figure in between the two, or on a
long-term or incentive-based deal, before the decision
has been announced.
The arbitrator's decision is based on the salaries of
comparable players. Thus, if other players and owners
negotiate or arbitrate contracts which are unreasonably
high or low, these will be considered as comparisons.
This is why owners and fans talk about arbitration as
"enshrining previous mistakes." However, a
single anomalous contract is not likely to have a major
effect on arbitration, since an arbitrator can recognize
it as an anomaly.
Arbitration is unlikely to force an owner to pay a
player more than his value. If the owner expects that the
player will request and earn more than his value in
arbitration, he can release the player instead of
offering arbitration. This is a good economic decision if
the player would have earned more than his value; that
is, if the amount of salary saved is more than the amount
of revenue lost. This rarely happened before the strike.
A fair number of players were released in 1995 rather
than being offered arbitration. In 1997, some of the top
free agents were not offered arbitration; their teams
thus gave up the draft pick they would receive as
compensation, but avoided the risk of paying these
players arbitration salaries which would be more than the
teams were willing to pay.
This is probably also why the players are willing to
give up arbitration in return for free agency for all
affected players.
C6. Are teams losing money?
MLB claims to have operated at a loss every year from
1975 to 1985, then at a profit every year from then until
the strike, although the profit was only $22M in 1992 and
$36M in 1993. The strike led to large losses; the
reported figures were $375M in 1994, $326M in 1995, and
$185M in 1996; attendance was still down by 15% in 1996
from its pre-strike level. The small reported profit in
1993 would be consistent with 12 of 28 teams losing
money, which is what Bud Selig claimed. Other sources
claim much smaller losses. Financial World
magazine estimates finances from publicly available data;
it reported a profit of $168M in 1993, with eight teams
losing money, a losse of $123M in 1994, and a profit of
$59M in 1995. The Rockies' ownership claimed during the
strike that seven teams lost money in 1993; the Sporting
News reported in August 1995 that only three teams were
losing money,
Which numbers are correct? It's difficult to tell
without open books; however, it is almost certain that
some of the teams which MLB claims are losing money are
not actually losing any. When the owners opened their
books to economist Roger Noll in the 1985 negotiations,
he found enough hidden revenue and accounting techniques
to turn the claimed $50M loss for 1984 into a $9M profit.
Since the current books have not been opened for public
analysis (although Noll has looked at them again), it is
impossible to tell whether the same techniques are still
being used.
The details of Noll's analysis are given in Baseball
and Billions.
One of the biggest problems in determining a team's
real profit or loss is the use of related-party
transactions; that is, transactions between two entities
which provide money to the same people. For example,
Wayne Huizenga owns both the Marlins and their stadium,
so he can set the stadium rent at whatever price he
wants, and thus cause the Marlins to show an artifically
high or low book profit. This is probably the basis for
his claim that the Marlins would lose money in 1997 even
if they sold out every game. Similarly, Ted Turner owns
both the Braves and WTBS; in the 1984 opened books, the
Braves had a low TV contract despite the superstation.
Another possibility is for the team to pay a large salary
or loan interest to the owner or to relatives of the
owner, instead of distributing the same money as profits;
the Brewers are reported to be doing this.
Another problem, which could be resolved by open
books, is the use (or abuse) of accounting practices. For
US (but not Canadian) tax purposes, half the purchase
price of a team may be attributed to player contracts.
This is considered to be a purchase of short-term assets,
which may be depreciated. Depreciation is normally used
to reflect the declining value of assets which will
eventually need to be replaced, so that a four-year-old
truck is not valued at the price it cost when new. This
does not make sense in MLB, because the true asset is not
the specific players, but the right to acquire players
for below their market value. The depreciation loss is a
paper loss, useful for its tax benefits, which will be
regained by the owner when the team is sold at its real
franchise value.
Also, part of the profits of owning a baseball team
(as with other investments) comes from the appreciation
of the franchise value. If you buy a team for $100M,
break even in cash flow for five years, and then sell it
for $150M, you have made a substantial profit, just as if
you had bought $100M worth of real estate and it became
worth $150M. And if you buy the team for $100M by taking
out $40M in loans, show an operating loss equal to the
after-tax interest you pay on the loans, and then sell it
for $150M and pay off the loan balance yourself, you have
made exactly the same real (economic) profit; the $40M
loans allowed you to invest an extra $40M somewhere else.
It is possible for a team to lose money without
overpaying for players, because the true values of the
individual players, plus non-salary expenses such as
stadium rent and player development, are not guaranteed
to cover the total revenue in a particular team. If there
are teams in this position, they could benefit from
revenue sharing, or from a tax or salary cap which
lowered salaries, and such moves might be necessary to
keep teams in these cities.
But it is also possible that teams which are losing
money are losing it because they are paying players,
particularly free agents, more than their value. Some of
these may simply be unlucky decisions, paying large
contracts to players who got hurt or declined
unexpectedly. This is a risk which should be calculated
in the value of the contract, along with the potential
gain if the player performs unexpectedly well; once this
risk is considered, the problem won't consistently affect
any team, although it may lead to single-year losses.
It is also probable that many players are overpaid
because of poor talent judgment; for example, paying a
32-year-old player the value of his performance at ages
26-29, expecting him to repeat it, is usually a bad
economic move. Such moves are made almost every time a
free agent over 30 is signed. Owners who lose money
because of such bad moves have the same interest in
making a profit as other owners, and may be more likely
to make a profit by a salary cap. From a free-market
point of view, this is not a good idea; the free market
will drive out incompetence, as such owners can make a
profit by selling their teams to competent ownership or
replacing their general managers.
C7. What is collusion?
Collusion occurs when a group acts in concert in
business. Thus, if several owners agree not to make
offers to each other's free agents, or to limit their
offers, they are guilty of collusion; this is what
happened in 1985-1987. (The cases were based on actual
evidence of such communications, not simply the fact that
some players received no offers.) It would also be
collusion if the owners agreed to follow a salary cap
without getting it in the CBA.
It is not collusion if owners act independently to
reduce expenses. Many teams have publicly announced their
budgets; this is fine as long as no team can control
another team's budget. Likewise, if a free agent asks for
$3M and he receives no offers because no owner thinks he
is worth that much, this is not collusion; it happened to
Jody Reed and Chris Sabo.
There were rumors of collusion in the April 1995
free-agent signings, because so many players took large
salary cuts. Charges were filed by the union, and there
were been some complaints by agents. However, this is
probably not collusion; most of the owners discovered
that they had less money after the strike and would make
less in 1995, and were thus more careful where they spent
it.
There is a clause in the CBA forbidding players or
teams from acting in collusion. It was put there at the
request of the owners, to prevent players from staging
joint holdouts. In 1985-1987, the players charged the
owners with violations of this clause. As specified in
the CBA, the hearings were held before an arbitrator, not
in a lawsuit.
C8. What are the owners' rights under
labor law?
If labor negotiations reach an impasse, management may
implement its last offer. This was the basis for the
owners' imposition of the cap on December 23, 1994. (MLB
made it clear that the salary cap was still the
"last offer," although tax plans had also been
offered.) One part of Judge Sotomayor's decision is that
the owners will have to bring a future declaration of
impasse before her, rather than simply declaring it. In
early August 1996, the owners announced that they would
make a "last offer" and ask Judge Sotomayor to
declare an impasse if the players refused, but this never
happened because what followed was two weeks of
productive bargaining, eventually leading to the final
agreement.
In order to impose its last offer, management must
negotiate in good faith. The National Labor Relations Act
has the following definition: "To bargain
collectively is...to meet at reasonable times and confer
in good faith with respect to wages, hours and other
terms of employment...but such obligation does not compel
either party to agree to a proposal or require the making
of a concession."
The owners could have attempted to lock the players
out; under the owners' negotiation rules, this would
require support from 3/4 of the owners, and they didn't
have the necessary votes. Such a lockout might not
prevent them from using strike-breakers; there is a legal
precedent for this, but it depends on the lockout being
part of good-faith negotiations. A lockout would make it
impossible for any union members (including all players
on 40-man rosters) to cross. A lockout could be dangerous
for the owners; if the lockout is ruled to be bad-faith
negotiation, the owners would then be liable for back
salaries, which would be a huge loss.
Another important point is that management may not use
poverty as a tactics in labor negotiations unless it
opens its books. The owners did open the books to be
examined by economist Roger Noll, but details were not
made public. Reports of Noll's conclusions suggest that
the owners' financial situation is much better than their
public claims.
Both management and labor are forbidden from engaging
in unfair labor practices. The NLRB filed unfair labor
practice charges against the owners for skipping the
August 1, 1994 pension payment; these charges were
withdrawn after the May 19, 1995 settlement. On the other
side of negotiations, the owners have filed complaints
against players who have threatened retaliation against
strike-breakers; the NLRB has ruled that this was not an
unfair labor practice because it was repudiated by the
union. The owners announced an intention to appeal, but
no appeals were ever reported. The penalties in these
cases would only be fines; they would have no direct
effect on the negotiations.
C9. What has happened in legal
proceedings?
The NLRB first threatened to issue a complaint that
the owners had not negotiated in good faith on February
3, 1995; the owners settled by withdrawing the cap.
However, they then responded to the players' ending their
signing freeze by initiating their own signing freeze,
and unilaterally renewing contracts by changing the
language to deny players the right to arbitration and
free agency.
On March 15, the NLRB issued a new complaint over this
charge. On March 26, it asked Judge Sotomayor to grant an
injunction restoring the old work rules. She granted this
injunction on March 31, and the MLBPA then terminated the
strike. When the owners decided not to lock the players
out, spring training began, with Opening Day postponed to
April 25.
The owners appealed this decision, and asked for a
stay of the injunction. The stay was denied by the Second
Circuit Court of Appeals on September 29. This upholds
Judge Sotomayor's ruling that the owners may not declare
an impasse without her approval. The injunction also
restored the old work rules pending a hearing on the full
charges. This hearing was postponed at least eleven times
as negotiations continued, was never held, and became
moot with the new agreement.
The complaint over the August 1, 1994 pension payment
was settled on May 19, 1995. The owners agreed to make
this payment with interest by June 1, 1995, and agreed to
make another payment on August 1, 1995, following the
All-Star game.
In the new agreement, the union has waived any right
to legal action against the owners for actions such as
unfair labor practices during the negotiations.
C10. What special arrangements were made
to get the 1995 season started?
Because the season ended with many players still
unsigned, special arrangements were made to allow these
players to play. The union set up a training camp for
unsigned free agents in Homestead, Florida; these players
could have played exhibition games against major-league
teams, with the proceeds going to charity. Unsigned
players who were offered arbitration were paid at the
club's offer until their cases were heard; if they won in
arbitration hearings, they would receive back pay with
interest.
The season was 144 games long. The union agreed to
relax some of the scheduling rules to make this possible;
for example, teams played on the day after the All-Star
Game.
Since pitchers may not have had adequate preparation,
a proposal was made to change the scoring rules; until
May 9, a starting pitcher could be awarded a win if he
pitched three innings, rather than the usual five. This
was later retracted.
D. Replacement Players
D1. Who would have played as replacement
players?
The owners made an official vote to play with
replacements and have games count in the standings; the
ending of the strike prevented this from happening.
Many teams never made it official which players in
camp were replacements and which were simply minor-league
players. Only a few players, mostly major leaguers who
have been retired for several years, were signed to
actual replacement contracts, although many other players
had been signed as probable replacements, and would be
identifiable replacements if they played with the
major-league team.
The Orioles announced that they would not use
replacement players. They maintained this policy,
releasing a player called up from AAA when they learned
that he had been a replacement player on another team.
(They honored the contract and agreed to pay him for the
rest of the season if he wasn't picked up.)
Peter Angelos, owner of the Orioles, confirmed that he
would not play even though the AL threatened the team
with sanctions, including fines of up to $250,000 for
each game forfeited and possibly taking over the team.
The Orioles were willing to play exhibition games, but
only against teams of players signed to minor-league
contracts, not against replacements; the other teams
refused to play under these conditions, and canceled
games with the Orioles instead.
The Blue Jays were forbidden by Canadian law from
using replacement players in Ontario. They received
permission from the AL to play regular-season games at
their spring-training park in Dunedin, Florida. The
capacity of this park is only 6218; this might be
increased to about 10,000, but that would still be a
major loss for a team which normally draws 50,000 fans
per game, and to the fans in Toronto.
The Blue Jays did not ask their regular manager and
coaching staff to work with replacement players; most
other teams did. Sparky Anderson refused to manage
replacement players, and took an unpaid leave of absence
instead.
It is unlikely that minor-league prospects would play
as replacements. They are the players who stand to gain
the most from a favorable settlement of the strike,
because they hope to play in the major leagues under
whatever new agreement is settled. Players who are
currently on the 40-man rosters become members of the
MLBPA as soon as they are called up. Most teams did not
even ask their prospects to be strike-breakers, and
several teams, including the Mets and Royals, made this
their official policy.
Most major leaguers who have been interviewed said
that they would not play as strike-breakers; Greg
Swindell has said that he might play, citing financial
problems. For veteran stars, it is a matter of principle,
as they will never earn as much as they will lose from
the strike. Younger players stand to gain as much from a
favorable settlement as future major-league players do.
Fringe minor-league players and veteran non-prospects
might play as replacements; a USA Today poll indicated
that 40% of minor-league free agents would
"probably" or "likely" cross. Also,
some released players who still believe they can play
might play. However, very few of the best players outside
the majors would get a chance to play; thus, once a
settlement is reached, most strike-breakers expected to
lose their major-league jobs.
This is a fundamental difference between baseball and
football. In baseball, the best potential players are in
the minors. If they don't make the majors, they are
working on developing their skills, and are still visible
to the major-league teams if they develop enough to make
the majors. It is common for a player to have a bad first
call-up, go back to the minors, and make the majors in
the next year. In football, potential players go to
training camp, and then either make the team or get cut.
The players who are cut will not be playing football for
at least a year, probably not developing their skills and
certainly not in position to be called up. It is thus
very rare for a player to make the NFL in his second try
at training camp, even if he is good enough to play. In
the 1987 NFL strike, some players who were cut after a
bad performance in training camp got their first extended
looks and were able to prove that they could play, a
chance which they would never have had without the
strike. This is unlikely to happen in baseball.
D2. What were the work rules and salary
for replacements?
Replacement players would make $115K per season, which
is the major-league minimum under the owners' November
17, 1994 proposal. Each team could offer up to $275K to
up to three replacements who have at least three years of
major-league service. Performance bonuses were not
allowed. Replacements did not receive meal money until
exhibition games began. Salaries were not guaranteed,
although players who were replaced by union players
(either as strike-breakers or when the strike ended)
would receive $20K in termination pay. With the strike
ending before opening day, the owners avoided the need
for these payments; the Marlins and Cardinals paid them
anyway.
Teams could carry 32 players, with only 25 allowed to
dress for each game; the other seven would be either
disabled players or players held in reserve on a
"taxi squad". There was no disabled list.
D3. What was the union doing to
discourage replacement players?
The union has ordered replacement players to show
cause or be denied membership in the union. Non-members
are ineligible to participate in the union's licensing
deals, and thus do not receive licensing money. For
example, Strat-O-Matic Baseball is licensed by the union;
non-members have cards with blank names. Non-members are
still governed by terms of the union contract, such as
health benefits.
The union threatened to decertify agents who represent
replacement players; this would forbid the agents from
representing union members. In response, many agents
announced that they would terminate relationships with
their current clients if the clients worked as
replacements. It is in the interest of agents as a group
that the players do well in the strike, because agents
receive a percentage of the salaries they negotiate.
However, individual agents could be tempted to represent
strike-breakers for short-term gain, just as individual
players could work as strike-breakers.
The union defines a strike-breaker as any player who
plays in an exhibition game at a major-league site or for
which admission is charged. This definition includes many
minor-league players who had no intention of working as
strike-breakers in the regular season. However, this is
the same definition that the owners used in the
conditions for minor-league players on work visas; such
players are not allowed to work as strike-breakers under
US law. The union has now made a list of such players,
and distributed it to major-league players.
An AP poll said that 63% of minor-leaguers not on
replacement contracts would honor this definition and
boycott replacement games, 29% were undecided, and 8%
would play. (Note that minor-leaguers not officially on
replacement contracts may choose to be replacements
later; such players are included in the above totals.)
Some teams did not punish minor-league players who refuse
to play in replacement games, while others sent them
home. The union offered to pay for plane tickets for
players sent home. Other teams offered positive
incentives to minor-leaguers who play, such as
major-league meal-money; several teams promised a
minor-league position for the full season.
There were picket lines at exhibition games, and there
would have been picket lines at major-league games as
well. However, the striking players themselves would not
man the lines, partly for safety reasons. The lines would
primarily be at the service entrances to the park, not
the fans' entrances, because their purpose is to
encourage other workers to honor the strike rather than
to keep fans away. Several unions, including the
Teamsters' union, whose workers deliver beer and other
refreshments to most ballparks, would honor the picket
lines. The Boston locals announced that they would honor
the picket lines; the Pittsburgh locals would not.
The United League announced that strike-breakers would
not be welcome as players when the league started. [Would
this have been legal if the United League didn't inherit
MLB's antitrust exemption?]
There have been a few players who have threatened
strike-breakers. This would be illegal, and would be an
unfair labor practice if it were endorsed by the union.
However, with or without explicit threats, it is likely
that union members will not be friendly with
strike-breakers. When the umpires last went on strike,
the replacements who stayed in the league were ostracized
by the union umpires. Union umpires would not speak to
them or back them up on the field. [Is this still the
case now?] There have been some comments in the press
about replacements being shunned in the clubhouse.
Although this seemed to be wearing off, the Dodger team
refused to allow replacement player Mike Busch to sit on
the bench during games in late August. Only one of the
replacement players who was eligible for a share of
postseason money in 1995 was voted a share by his
teammates, and he received only a token $250; a similar
situation happened in 1996. (One other player was on the
roster in 1995 long enough to get an automatic share.)
There haven't been any reports of violent incidents such
as pitches thrown at batters.
The union has still not accepted former replacement
players as members. It has been left up to individual
teams whether to allow these players to attend union
meetings; most teams allowed them, while the Expos
didn't.
D4. What is the legal status of
replacement players?
Management has the right to hire replacements for
workers on strike. However, Ontario law used to forbid
this, which means that the Blue Jays would have been
unable to play with replacements at home. They chose to
play at their spring training park in Dunedin, Florida,
with the permission of the league. The law has since been
repealed.
The city of Baltimore and the state of Maryland have
passed laws forbidding the use of replacement players at
Camden Yards; it is not clear what effect this would have
had on the league's attempt to force the Orioles to play.
Several other cities and states were considering similar
measures.
Also, it is illegal to import foreign workers to work
as strike-breakers in the USA, once the Department of
Labor has recognized the strike, which has happened. This
means that non-citizens who were not already on the
40-man rosters when the strike started would be
ineligible to play, and could not get visas. It appears
that even non-citizens who were on the rosters would not
be able to get visas; thus, if they have left the
country, they would be unable to apply for visas to
return until the strike has been settled, and some of
them will be delayed in returning to camp until they get
their visas. However, non-citizens who play in Montreal
are not replacing US workers, and thus would be allowed
to play for the Expos and enter the USA.
A similar law applies in Canada. This would prevent
strike-breakers other than Canadian citizens from playing
in Montreal, except that the Expos received an exemption
on the grounds that the foreign workers would not be
replacing Canadian citizens. It could have also applied
to Toronto, if the Blue Jays had tried to play there.
D5. What was the status of TV and radio
broadcasts of replacement games?
Since there were no replacement games in the regular
season, many official policies were never announced; the
information in this section is thus probably incomplete.
Some broadcasters have escape clauses in their
contracts which relieve them of their responsibility to
televise games with replacement players. Such stations
would be likely to cancel or cut back on broadcasts,
because replacement ball would be likely to draw poor
ratings, and be difficult to sell to advertisers. KTVT,
which carries the Rangers, and KTXH, which carries the
Astros, announced that they would not carry any
replacement games. KRON, which covers the A's, dropped
all of its April broadcasts. The Blue Jays' radio
station, and the TSN and Baton stations which carry the
Blue Jays on TV (but not CBC, which has no broadcasts
until June and thus didn't need to make an early
decision), canceled all broadcasts of replacement games.
Many other stations considered canceling games or
negotiating for reduced rights fees but have not
announced positions.
WABC, the radio station which carries the Yankees,
filed a suit for damages, claiming that it cannot sell
any advertising for an inferior product; this suit was
withdrawn after the strike ended.
E. Rival league
E1. What is the history of the United
League?
The United League originally planned to start in 1996
but was not able to get stadiums built in New York and
Los Angeles in time. The opening was then postponed to
1997. On April 11, 1996, the league folded, citing
difficulties with stadium construction and television
contracts.
The league planned to start with two four-team
divisions, with a playoff between the division champions
to determine the league championship. There were plans
for future expansion to the Far East. Some games would
have been televised by Liberty Sports and its regional
networks, but Liberty then merged with Fox, and Fox
already had a contract with MLB.
The United League would sign free agents from the
major leagues, and professional players outside MLB.
[Does this mean that it would respect MLB's reserve
rules?]
Franchise fees were only $5M, with start-up costs
estimated at $20M. The average salary was projected to be
$520K, less than half the current major-league salary;
however, the players would have a 35% equity share in the
league as well. Thus, although total salaries would be
limited, player compensation, which includes a share of
league profits, would not be. The original plan would
have allowed cities to have an equity share if they built
stadiums; this has now been abandoned.
There would have been 20-player "taxi
squads" as well as the regular rosters. Players on
the taxi squad would practice with the team but not play
in the regular game; they might play additional games
before the regular game. In effect, each team would carry
its own farm club with it.
The establishment of a successful rival league is
likely to cost existing MLB teams more than any possible
settlement of the strike could cost. It will create
competition, particularly if both leagues have teams in
the same metropolitan area; even where this doesn't
happen, there will be competition for a national TV
contract. It will also create much stronger competition
for players; a player who is not under long-term contract
may receive competing offers from his own MLB team and
several teams in the rival league.
E2. Where could teams play in a rival
league?
The United League intended to play in the following
stadiums:
Eastern Division:
- Kissimmee, central Florida, Osceola County
Stadium.
- Puerto Rico, Juan Ramon Lubrieal Stadium.
- Suffolk County, Long Island, stadium would be
built for the 1996 season.
- Washington, RFK Stadium.
Western Division:
- Los Angeles, LA Coliseum (It was later
decided to build a new stadium.)
- New Orleans, Superdome.
- Portland, Portland Civic Stadium.
- Vancouver, B.C. Place.
If any current MLB teams have non-exclusive leases or
leases about to expire, the rival league might be able to
hold games in their stadiums. The United League didn't
try this, but it is an option for any future rival
league.
Football stadiums which were not designed for multiple
use may be difficult to play baseball in. In particular,
domes such as the Silverdome may not be wide enough to
accommodate a reasonable outfield.
But it has happened in the past. When the Dodgers
moved to LA, they played four years in the LA Coliseum,
with a very short left field but a high fence, and a deep
right field. The United League planned to do the same.
F. Credits
Thanks to Ken Emery, Alan Foonberg, Ted Frank, Mike
Jones, Thomas Kettler, Brian McAllister, Sherri Nichols,
Subrata Sircar, Thomas White, and Mark Wolfson, for
comments on the original draft or subsequent versions, or
substantial contributions to existing sections. Thanks
also to everyone on the net who has contributed
information which has been used here (there are too many
people to list individually).
G. Copyright and disclaimers
This document is Copyright 1998, David Grabiner. The
document may be copied and distributed freely in
unmodified form, provided that this notice remains
intact. It may not be sold or included in a collection
which is sold without the permission of the author.
The opinions in this document are those of the author,
not necessarily those of the University of Michigan.
Legal opinions included here should not be considered
legal advice.
This document may be cited as,
David Grabiner, "Frequently Asked Questions
about the strike," [date under "Last Modified"], available
electronically from
ftp://remarque.org/pub/baseball/faq/strike.FAQ
Please note that this document was written as a
reference point for an ongoing discussion rather than an
authoritative article. If the facts may have changed,
please check the "Last Modified"
date to make sure that the current version is being
cited. You may also want to check with the author or
confirm facts from another source.
FAQs 
