The Captain's Blog

Because Major League Baseball teams share revenue, but are not subject to a salary floor, teams can pretty much guarantee a hefty profit by maintaining a low payroll. However, according to the collective bargaining agreement (CBA), clubs are supposed to use revenue sharing to enhance their winning percentage, not their bottom line. The MLBPA isn’t convinced that every team is operating in accordance with that stipulation, and the recent trend toward tanking seems to back up their claim. Unfortunately, MLB’s revenue sharing plan remains shrouded in a bit of mystery. Not only is the formula very complicated, but the exact inputs remain elusive. However, there is enough information available to build an educated model from which to assess the plan’s effectiveness.

MLB really has two revenue sharing components. The first is the Central Fund, which collects revenue derived from national sources (e.g., network TV rights and merchandizing) and then distributes an equal share to each team. According to Forbes’ estimates, in 2018, about $2.76 billion was allocated in this manner. The second component involves local revenue, which Forbes estimates to be about $7.29 billion, a portion of which funds MLB’s “Revenue Sharing Plan.”

As defined by Article XXIV of the CBA, the basis for the revenue sharing plan is a percentage of each team’s “Net Local Revenue”, which is basically the money a team makes in its local market (mostly ballpark and media related receipts) minus the cost of stadium expenses, including debt service. Also excluded from this total are distributions from the Commissioner’s Discretionary Fund as well as post season revenue. After making all required deductions, what remains is net local revenue. However, the formula for the plan is not as simple as multiplying this figure by a constant rate. Rather, each team’s contribution to or receipt from the plan involves a multi-pronged, retrospective accounting of net local revenue. A hypothetical calculation is detailed in the model link above and outlined below.

Please note, for this exercise, Forbes’ net revenue estimate is used. However, that figure includes post season revenue and revenue sharing transfers, so, though the net transfer amounts of the plan should be accurate (assuming Forbes’ estimates are), individual team contributions or receipts may be under or over stated.

Net Transfer Value (Tab 1 in model)

The net transfer value (NTV) is the amount of money that will eventually get sent from payors to payees in a “revenue sharing year”. To calculate NTV, 48% of each team’s net local revenue in the preceding year is added to a straight pool from which an equal share is then re-distributed. The net between each team’s contribution and receipt is its transfer value. Those with a negative value are payors. Those with a positive value are payees. The sum of either amount is the NTV, which, for each payor, is also expressed as a percentage of the total. This rate is used to determine a payor’s refund, when applicable (see “Market Disqualification Refund” section below).

Note: Net Local Revenue is defined by the CBA as “Club’s Local Revenue less its Actual Stadium Expenses”, but it excludes distributions from the Commissioner’s Discretionary Fund as well as post season revenue. For this exercise, Forbes net revenue is used. However, that figure includes post season revenue and revenue sharing transfers, so, though the NTV of the plan should be accurate, individual team contributions or receipts may be under or over stated.

In the hypothetical model, the NTV for 2018 was $539 million, or about 8% of aggregate net local revenue. Twelve of 30 teams were net payors into the straight pool, ranging from the Yankees at 30% to several teams at 1%. Keep in mind, however, these figures are not the actual amounts each team will either pay or receive. NTV is merely the first step in a longer formula.

Blended Net Local Revenue Pool (Tab 2 in model)

The blended net local revenue pool is a calculation based on a blended average of each team’s last three years of net local revenue (50% for most recent and 25% for prior two). This method is used to smooth out year-to-year variance in revenue. As with the NTV, the Blended Net Local pool yields a transfer amount for each team that is expressed as a percentage of the aggregate, but this time for both payors and payees.

Note: Net Local Revenue is defined by the CBA as “Club’s Local Revenue less its Actual Stadium Expenses”, but it excludes distributions from the Commissioner’s Discretionary Fund as well as post season revenue. For this exercise, Forbes net revenue is used. However, that figure includes post season revenue and revenue sharing transfers, so, though the transfer value of the Blended Net Local Revenue pool should be accurate, individual team contributions or receipts may be under or over stated.

Revenue Sharing Calculation (Tab 3 in model)

With the NTV and “transfer percentages” determined, each team’s unadjusted revenue sharing payment or receipt can be calculated via simple multiplication. Although the NTV percentage and blended pool transfer percentage will be similar for most teams, this two-pronged approach benefits clubs with strong revenue growth. So, for example, the Yankees, whose revenue sharing hit would be $162 million under the straight pool NTV approach, get a bit of a break (about $5 million) from the hybrid approach that uses a transfer percentage based on the blended pool.

Market Disqualification Proceeds (Tab 4 in model)

In order to prevent large market teams from becoming revenue sharing payees, the CBA assigns a market score to each club. Any team assigned a score of 100 or higher is disqualified from receiving funds. In the hypothetical model, $107 million of funds (about 20% of the pool) was disqualified, mostly at the expense of the A’s ($54 million), White Sox ($26 million) and Blue Jays ($25 million).

Market Disqualification Refund (Tab 5 in model)

Once the disqualified funds are pooled, they are refunded back to the revenue sharing payors based on their contribution to the NTV (not the Blended Net Local pool) of the plan. Just to add a little bit more complication to the formula, revenue sharing payors are subject to a forfeit penalty that is based on the number of consecutive seasons exceeding the competitive balance tax (CBT) threshold. In 2019, only the Red Sox, who had been above the threshold for two straight years, were subject to a forfeit penalty (25%).

Forfeited Refund Distribution (Tab 6 in model)

What does MLB do with the Market Disqualification refunds that are forfeited? Half of the total “is used to fund benefits to Players via the Major League Baseball Players”, while the other half is distributed back to qualifying revenue sharing payees (i.e., those that are not disqualified or CBT payors). This disbursement is done in proportion to each team’s revenue sharing receipts.

Final Revenue Sharing Receipt/Contribution (Tab 7)

After applying refunds and reallocating forfeited amounts, the end result is a net payment into or distribution from the revenue sharing plan. Even though the percentage of total local revenue transferred ends up being quite small (about 6%), there are big impacts at the margins. The Yankees end up chipping in nearly 20% of their gross local revenue (using Forbes’ 2018 estimate of $712 million), while teams like the Marlins and Rays increase their local take by over 50%. In terms of transferring wealth from the haves to have-nots, MLB’s revenue sharing plan seems to be working. But, remember, that alone isn’t the purpose of the plan.

The CBA explicitly states that “each Club shall use its revenue sharing receipts…in an effort to improve its performance on the field.” So, when the Pirates, for example, cut payroll, but report an operating profit that’s about equal to its revenue sharing receipts, there’s good reason to question whether the team is living up to its obligation. Unfortunately, simply spending money out of obligation isn’t necessarily the best way to improve on field importance. For that reason, the MLBPA’s best course of action may not be to file grievances or press for a salary floor, but rather seek to supplement the revenue sharing plan with an additional pool of money that is based on winning percentage. After all, what better way to encourage a team to “improve its performance on the field” than by providing a financial reward for doing so?

As a reminder, the model upon which this analysis is based has inherent flaws. Without access to the precise inputs that go into the formula, we can’t definitively calculate exactly how much each team is contributing to or drawing from MLB’s revenue sharing plan. Still, at the very least, this analysis not only helps to illustrate how the plan works, but also whether the design is effective for meeting the stated aim.