SBJ/December 5-11, 2011/Opinion

MLB moving in the right direction with cap and tax system

Scott Boras doesn’t like the amateur draft cap and tax plan in MLB’s new collective-bargaining agreement. He says that it will promote competitive imbalance and that the system will need to be modified. Boras seems to have persuaded a gaggle of sports journalists that he is right. He is not.

The Boras argument goes something like this. The small-market teams cannot compete with the large-market teams in the free agent and trade markets for major league players, so the only way they can compete is in the market for amateur players. Accordingly, the small-market teams outspend the large-market teams in order to sign the best amateur players and, thereby, improve the competitive strength of their teams. The new rules limit their spending in the amateur (Rule 4) draft and set a stiff penalty (75 to 100 percent, and potential loss of picks) for exceeding the cap limit. This cap and tax plan, says Boras, wipes out the existing advantage of the small-market teams in the amateur player market and will only serve to increase the relative strength of the large-market franchises.

Boras and his messengers then point to their empirical evidence. The small-market Pittsburgh Pirates spent $17 million in signing their 2011 Rule 4 draft picks, more than any other team. The lowly Pirates, of course, have not finished above .500 since 1992, but this past year they finished above both the Cubs and the Astros in the NL Central. The hope is that under the smart leadership of Frank Coonelly at president and Neal Huntington at general manager, the team will take advantage of its early picks in the amateur draft and begin to challenge for a postseason berth in the coming years. Alas, says Boras, that hope is now dashed by the cap and tax plan.

What’s wrong the Boras argument? Let me count the ways.

First, there is nothing unexpected to see a small-market team, like the Pirates, outspend big-market teams in amateur draft signings. After all, MLB has had a reverse-order draft since 1965 wherein the lower finishers are given the top draft picks, and the top amateur picks in the first round command the most money. Such an outcome is as much a product of having to spend more money to sign the early picks as it is of team strategy.

Second, that said, the Pirates draft spending in 2011 is not representative of the general pattern. The team with the highest draft spending over the last three years is the large-market Washington Nationals; on average, they outspent the Pirates by $4 million a year. The Nationals, of course, though in a large market and new stadium, were in a position to spend a lot because they had lowly win percentages and early picks each year.

Boras’ hypothesis would predict a strong inverse correlation between a team’s market size and its draft spending. In fact, in none of the last three years is there a statistically significant correlation between the two variables. The third-highest draft spenders over the last three years were the larger-market Red Sox, while the smaller-market Marlins, Twins and A’s were all among the lowest spenders (each spending less than $5 million a year).

Third, the cap and tax plan is based upon a progressive structure of different caps for each team. The team with the lowest win percentage the prior year is allocated the highest cap, while the team with the highest win percentage is given the lowest cap. For 2012, the per team caps run from $4.47 million to $11.49 million. These levels will increase annually at the rate of growth of aggregate industry revenue. It is therefore not surprising that Pittsburgh’s Coonelly has stated that he has no worries that the Pirates will be able to continue to sign their top picks — and now with the added benefit of spending less money to do so. Further, this outcome will diminish the probability that small-market teams won’t be able to sign their top picks, a problem that has undermined the balancing intent of MLB’s amateur draft.

A significant problem is that spending on the top amateur picks has accelerated over the last five years. Small-market clubs have often skipped the top-rated players for fear that they wouldn’t be able to sign them. These players are then drafted later by large-market teams and signed for big bonuses. This has pushed up the value of the higher picks. If the growth of amateur signing bonuses continued at its 10 percent annual rate between 2006 and 2010, the small-market clubs would not be able to remain competitive in this market.

Fourth, for the first time, baseball has added a competitive balance lottery for six extra picks between the first and second rounds and between the second and third rounds. These picks will be allocated via lottery to the 10 teams with the lowest local revenues and the 10 teams with the smallest markets. And, for the first time, these picks will be tradable (for players, not cash).

Fifth, similar changes are being made with the international signing of players wherein each team will have a restricted signing bonus pool. Teams will have different pool allotments, inversely related to win percentage, and varying between $1.7 million and $4.6 million in 2013. These allotments will also be tradable.

Sixth, the cap and tax system is being instituted instead of a rigid slotting system. The system allows for more flexibility in allocating signing bonuses. Together with the new provisions for trading, the new system rewards managerial intelligence and ingenuity.

To be sure, the draft system is but one part of the overall CBA. Many other parts also relate to competitive balance and, I believe, will also support greater parity.

While baseball will gain from the new CBA, Scott Boras will not. His ability to get large signing bonuses for his domestic and international amateurs will be curtailed.

The new system is not perfect, but it is a step in the right direction.

Andrew Zimbalist (azimbali@smith.edu) is the Robert A. Woods Professor of Economics at Smith College. His latest book is "Circling the Bases: Essays on the Challenges and Prospects of the Sports Industry."

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