1/14/98: Tax imposed and details added for 1997 (A1)
12/14/97:
Many free agents not offered arbitration (C5)
11/14/97:
No changes
This is an attempt to get quick answers to some common questions, to reduce repetitive discussion from newcomers who often don't understand the issues, and to provide single, authoritative answers so that rec.sport.baseball doesn't get overwhelmed with several people making the same point, whether correct or incorrect.
Constructive comments, corrections, and suggested additions are welcome; please send them to me at grabiner@math.lsa.umich.edu. In particular, I would appreciate suggestions from people who have some expertise. I have left square brackets in several sections; comments there would be particularly appreciated.
If you want to comment on an economic or legal point, make sure that you understand the underlying economics or law first.
You can get a current copy of this FAQ in the Usenet group rec.sport.baseball, or from
http://remarque.org/baseball/Faq/strike.FAQ.html ftp://remarque.org/pub/baseball/faq/strike.FAQ
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.
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.)
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.
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.
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.
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.
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.
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).
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.
