Should teams receiving revenue sharing earn a profit?

June 23, 2010: Hanley Ramirez  for the Florida Marlins in action during an interleague game against the hometown Baltimore Orioles at Oriole Park at Camden Yards in Baltimore, Maryland. The Marlins beat the Orioles 7 - 5.

Hanley Ramirez - ZumaPress

The long-held assumption among many has been that Bob Nutting is pocketing a fortune as the Pirates principal owner. That he is ripping off the city of Pittsburgh. Now that it has become apparent that the team is making just a modest profit, the complaints among frustrated Pirates fans has shifted. Now, any profit is too much, as long as the team is losing. While this dramatic shift is somewhat comical, there is a more relevant issue. Should a team receiving significant revenue sharing be permitted to show even one dollar of profit?

Maury Brown has some thoughts:

Here’s a suggestion: Clubs can receive revenue-sharing, but if by the end of the year when the books are completed a club is shown to make a profit, those profits would go back to the league as a rebate where they would be funneled back to the payors of the subsidy. In doing so, clubs that need revenue-sharing get what they need, but not a cent more. You’re not saying, “Discontinue revenue-sharing”, you’re saying, “You only get as much as you need and not a cent more. Want to make a profit? Earn it.”

It makes some sense upon first reading. But in my mind, it goes against the entire purpose of revenue sharing, which is to ensure competitive balance. Revenue sharing allows the Rays to play on the same field as the Yankees, even without the sweet broadcasting deal. It gives the Pirates an opportunity to spend heavily on the draft in order to refuel a barren farm system. And while it is not necessarily apparent at first glance, teams need to operate in the black the majority of the time to remain financially and competitively stable.

Let’s look at the Pirates’ situation. The recently revealed records show the team with a $15 million net profit in 2007 and a $14.4 million net profit in 2008. We do not have official records for the past 1.5 years, but the Pirates claim the yearly profit was about $5.4 million in 2009 and that they expect to break even in 2010. So let’s say the net profit was approximately $35 million over the four-year period. That’s $35 million the Pirates would have paid back to Major League Baseball under Brown’s concept.

Now let’s jump forward to a purely hypothetical (and extremely optimistic) situation. It is February of 2013. The Pirates won 77 games in 2011 and 86 games in 2012. The second half of 2012 saw the developing Bucs finish 48-33 and fall short of the wild card berth by four games. Pittsburgh is buzzing after two decades of losing baseball, and season ticket sales are strong. The Pirates have locked up Pedro Alvarez and Andrew McCutchen to long-term deals, and are hoping to do the same with budding superstar Anthony Rendon. The payroll sits around $65 million, and is projected to increase in the near future. The team is full of talent, with one glaring hole. The best shortstop option is Pedro Ciriaco, who has failed to crack the .300 wOBA mark in two consecutive years as the starter. His glove has proved to be league average at best. The front office runs some numbers, and projects the team to win anywhere between 84 and 87 games. A quality shortstop could mean the difference between the playoffs and another October with the family. Suddenly, Neal Huntington stumbles into an opportunity to acquire Hanley Ramirez. The Marlins are not expected to contend, and are looking to unload the two years, $31.5 million left on Ramirez’s contract.

There is only one problem. The Pirates are tapped out financially. Even with the expected boost in attendance, they cannot afford a payroll over $70 million without losing money.

Wouldn’t it be nice if they had some room to work, because they had an extra $35 million lying around from the 2007-2010 years, when the team was far from contending? That would allow them to work in the red, at least for a couple of years while a strong team tried to make a run at a championship. Unfortunately, the team had to give that money back because it looked bad that team’s receiving financial handouts showed a net profit on the balance sheet. While attempting to fill the shortstop position with several different internal options, the Pirates average 84 wins between 2013 and 2016, never quite reaching the postseason.

Let me reiterate that this is purely hypothetical. I am not making the claim that Pirates ownership has been hiding profits in their shoeboxes for years, lying in wait for their opportunity to attack free agency someday. Like many fans, I remain skeptical of that sort of concept. This is just a possible example of how the idea of a revenue sharing rebate could hurt the competitive balance that the program was originally designed to solidify. Another issue is that it could negatively influence baseball related decisions. What if the Pirates decided to sign Freddy Sanchez and Jack Wilson to new deals instead of trading them last year, just to ensure the team didn’t end up making a small profit? The Pirates would be a weaker team right now, and Sanchez would quite possibly be blocking Neil Walker from getting on the field.

The problem with this rebate proposal is that it essentially creates arbitrary endpoints at the beginning and end of any particular year. Assuming that a low-revenue team that is profitable for a certain year will always be profitable is a large assumption. The payroll of low-revenue teams, much like the talent level, is cyclical. Payroll is low as a group of talent is accumulated, it rises as that talent becomes competitive and it falls again as that talent departs via free agency. The process then starts over again. The Rays and Brewers are perfect examples of this. Eliminating low-revenue teams’ ability to follow this natural cycle would just provide high-revenue teams like the Yankees one more competitive advantage. That is bad for baseball. By looking only at the bottom line, as opposed to performing an in-depth look at the team’s operations, we are not necessarily seeing whether a team is using revenue sharing funds appropriately and making a legitimate effort to win baseball games over making money. It is the responsibility of Major League Baseball and the Players Association to ensure that these teams are doing so, instead of just glancing at a balance sheet once a year.

 

Author: Matt Bandi

Matt has covered the Pirates at Wait ‘Til Next Year, Pittsburgh Lumber Co. and now Pirates Prospects. He served as Pirates team expert for Heater Magazine in 2009 and 2010 and has contributed to Graphical Player 2009, 2010 and 2011. Matt was also the editor of the 2011 and 2012 Pirates Prospects Annuals.

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  • Matt

    Well said, Bandi.

    People guff at the thought that the Pirates and Marlins are simply handed a check from the Yankees, and think it’s unfair, all the while complaining that the MLB is and will never be as balanced as its salary cap brethren the NHL and the NFL.

    The profit sharing is a small step towards equalizing the financial playing field, and as you stated giving back any excess negates that. The entire point is that the excess is to be used to help make the gap between the Yanks and the Bucs that much shorter. Even with the profit sharing, that’s still a huge gap.

    Besides, we all know the Yankees could really use that $30MM. Cliff Lee’s new contract is coming soon.

  • http://kenbaldonieri.com Crackbaldo

    The other point that Brown seems to miss is that clubs like the Bucs and Rays are part of a league, along with the Yanks. The Yakes don’t generate their revenue stream in a vacuum. They’d have a hard time selling ad time on the YES network if all they showed were split squad scrimmages. If the small market owners had half a cojone, they’d force the big market clubs to have true revenue sharing by throwing all the local revenue into one big pot to split up evenly.

  • tcp

    You might be interested to learn that ALL teams get a cut of the revenue sharing money – even the mighty Yankees. It’s just a matter of how much of a cut. People seem to think that the revenue sharing money is money taken away from the richest clubs and give to the others but it’s not.

  • Mark

    Your example doesn’t make any sense. I thought they WOULD receive revenue sharing up until they made a profit? If they did the deal to get Hanley in 2013, or whatever, wouldn’t they still have profit sharing dollars in that year to use and protect them against the hypothetical financial loss it would cause?

    And why would they resign players to bad deals to “ensure the team didn’t end up making a small profit”? Isn’t their goal to make a profit? I don’t understand why they would want to make sure they didn’t.

    Also, as far as I understood the initial purpose behind revenue sharing it wasn’t to “restore competitive balance.” MLB started it to keep a whole bunch of small market teams from going bankrupt… “competitive balance” is just the spin.

    Profit sharing obviously needs to be reworked. But your post is really confusing… I’m not really sure what your position is.

  • maguro

    Overall, public sentiment seems to have evolved from the notion that the players should disreagard personal profit and play for the love of the game and the affection of the fans, which was prevalent when I was a kid, to the even more ludicrous notion that owners should disreagard personal profit and own for the love of the game and the affection of the fans.

  • Don

    Um, $35 million over four years is modest profit? Hardly! Now, 44 wins in 133 games is at best modest.