Revenue Sharing

Maury Brown did an interesting article on The Hardball Times today about the upcoming battle on revenue sharing, with baseballís Collective Bargaining Agreement coming to an end. It seems clear to me that the current model does not work, but I think it can be easily revised to do its job better.
The first question at hand is, what is the point of revenue sharing? In my opinion, the revenue sharing system is supposed to help low-revenue teams get better, and put the money towards payroll. Thus, there are two important parts to the process: (1) Making sure we tax the teams with the most money, and (2) Making sure that teams put as much money towards payroll as possible. Baseball pretty much accomplishes the first already, but I think it isnít doing the best job of doing the second step. Of course, Iím not one to criticize without offering a solution (generally), so let me come up with a solution of my own.
Hereís what I would do:
1. Order the teams in terms of revenue minus average revenues. I did this with the numbers provided by Forbes in its team valuations, though I adjusted it back to account for the luxury tax and revenue sharing. Tax only the teams with above average revenues, and give money to the teams with below average revenues. Fourteen teams, from the Yankees to the Phillies, have above average revenues.
2. To determine how much each team has to share, first subtract their payroll from their revenues. This is done so that we donít over-tax high-revenue teams that also invest in their product. Take the number we plan on re-distributing ($312 million in 2005), and divide it by the total of the sharing teamsí revenues minus payroll ($1.439 billion in this case). Then multiply that by each teamís revenue minus payroll to figure out how much theyíre expected to share. (For example, the Yankees had $384 million in revenues, and a $208 million payroll, so there expected contribution would be (384-208)*(312/1439) = $38 million).
3. To determine how much each low-revenue team should receive, again subtract payroll from total revenue for those teams with below-average revenues. Now, because we want to reward those teams with the highest payroll in comparison to their revenues, divide 1 by their revenues minus payroll. This way, the team that spends the most in comparison to their revenues will also get the most money in revenue sharing. Now multiply that number for the team by $312 million divided by the sum of those numbers for all the teams (.28456). (For example, the Aís had a $55 million payroll and $115 million in revenue, so their share of the pot would be 1/(115-55)*312/.28456 = $18 million.)
AndÖweíre done. If youíve been with me the entire time, I think youíll see that what Iím doing is not only very simple, and also fair. While the high revenue teams give a good chunk of money to low revenue teams, both are encouraged to spend as much as possible. For every $2.5 million of payroll it adds, a team will save (or receive) a little over a million dollars, meaning that you can buy a lot more for a lot less.
This would help a lot in terms of making the burden fairer, and in motivating low revenue teams to spend more. My system identifies the Yankees and Red Sox as two teams that are overpaying by a lot ($38 and $23 million, respectively), because while both have high revenues, they also put a lot of money back into the team. On the other hand, teams like the Astros and Braves are really underpaying (by $12 and $11 million, respectively) because their earnings are much higher than their payrolls indicate, even if theyíre not quite in the same league as the Red Sox and Yankees financially.
My system also better identifies who should be getting more money, and who should be getting less. The Marlins and Twins, who both had respectable payrolls for small-market teams in 2005, would both get $8 million more than they do under the current system. Maybe the Marlins wouldnít have had a fire sale then. On the other hand, teams like Tampa Bay and Kansas City, who have done little to improve even with revenue sharing, would get a lot less, though still a good amount ($12 and $8 million less, respectively).
This certainly is not the end-all-be-all of revenue sharing systems. It was basically a fifteen-minute exercise to come up with the framework and do all the math. Nevertheless, I think itís clear that some simple changes to the revenue sharing system could really improve it quite a bit, and make some great incentives for teams to spend, spend, spend!

Team	        Revenue	Payroll	Rev Share MLB	Rev Share DSG
NY Yankees      384	208	76	        38
Boston	        259	124	52	        29
New York Mets	219	101	24	        26
Chicago Cubs	211	87	32	        27
Los Angeles	209	83	20	        27
Seattle	        204	88	25	        25
San Fransisco	185	90	14	        21
Houston	        184	77	11	        23
St. Louis	184	92	19	        20
Atlanta	        182	86	10	        21
LA Angels	178	98	11	        17
Chicao WS	175	75	18	        22
Philadelphia	170	96	-6	        16
Baltimore	154	74	-2	       -14
Texas	        153	56	0	       -11
San Diego	152	63	-6	       -12
Cleveland	144	42	-6	       -11
Washington	141	49	-4	       -12
Arizona	        132	62	-13	       -16
Colorado	129	48	-16	       -14
Cincinnati	121	62	-16	       -19
Detroit	        121	69	-25	       -21
Oakland	        115	55	-19	       -18
Milwaukee	107	40	-24	       -16
Toronto	        105	46	-31	       -19
Pittsburgh	100	38	-25	       -18
Minnesota	92	56	-22	       -30
Florida	        88	60	-31	       -39
KC	        87      37	-30	       -22
Tampa	        83	30	-33	       -21

2 Responses to Revenue Sharing

  1. I wrote about revenue sharing on Monday at Double Play Depth. I think one of the things that will be an issue is the fact that some teams take in more money in revenue sharing than they spend on the field. The idea is that revenue sharing money is supposed to go directly to on-field performance. If that’s not happening, there’s a problem. That aspect needs to be considered in assessing a soluation to an imperfect revenue sharing system.
    Does baseball need a minimum payroll?

  2. David Gassko says:

    I would love for baseball to have a minimum payroll, but that’s never going to happen, which is why I like my option instead (though I think it can be done a bit better than what I published here). But again, the basic system I proposed in this post does reward teams for spending money, and (sort of) punish them for not doing so. I would like to revise it so it would do it a little more harshly.
    Still, if you look at the table, under my system Florida, whose payroll was double Tampa Bay’s, would get $39 million in revenue sharing, meaning that they would have $67 million in (revenue + revenue sharing – payroll), whereas Tampa Bay would only get $21 million, despite slightly lower revenues leaving them with $74 million in (revenue + revenue sharing – payroll). Under the current system Florida will have $59 million, and Tampa Bay will get $86 million. So my system closes the gap 75% of the way.

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