Frank Coonelly Fighting for Small Market Teams Against the Yankees

I’ve talked a bit on here about the changes that have been discussed for the posting system for Japanese players. If you’re unfamiliar with the system, it is the process that allows a player from a Japanese league, such as Nippon Professional Baseball, to sign with a Major League team.

The former agreement allowed teams to bid on the player. The highest bid, or posting fee, would win the rights to negotiate a contract with that player. For big name players like Yu Darvish and Daisuke Matsuzaka, the posting fee could reach $50 M. That amount would go to the Japanese team that was posting the player, but only if the MLB team signed the player. If the player wasn’t signed, the team would get their posting money back. The end result is that these players can receive about $100 M, with half going to the Japanese team as a posting fee, and half going to the player under his contract.

The newly proposed deal was aimed at keeping more money inside Major League Baseball by lowering the posting fees. There was talk that the new deal would allow the player from Japan to choose between the top 2-3 bidders, which meant that the high bidder wouldn’t always get the player. It wouldn’t matter to the player who made the highest bid, since that money would be going to his former team. This idea would have meant that big spenders like the Yankees and Red Sox wouldn’t have been guaranteed the inside track to every big name player out of Japan.

Instead, the new plan made a slight adjustment. The player still goes to the highest bidder, but the highest bidder only has to pay an average of the top two bids. That means if the highest bidder offers $50 M, and the second bidder only offers $30 M, the high bidder will only have to pay $40 M. Under the old system, the high bidder would have had to pay $50 M no matter what. Essentially the new system does nothing to remove the advantage that large market teams have, but it actually helps them by saving them money compared to the old system.

You hear these types of things all the time in baseball, and you wonder why small market teams never fight back — or at least why you never hear about it. According to David Waldstein of the New York Times, the small market teams are fighting back this time, or at least Pittsburgh Pirates president Frank Coonelly is fighting back. Waldstein says that a last-minute dispute by Coonelly put the new deal in jeopardy.

Frank Coonelly Pittsburgh Pirates
Frank Coonelly is fighting back against the proposed posting system.

According to the report, Coonelly argued that the posting fee should count against the bidding team’s luxury tax. This off-season will feature top Japanese pitcher Masahiro Tanaka, who the Yankees are expected to bid on. The Yankees are running up against the luxury tax, which has a financial penalty if they exceed a $189 M payroll. A team is taxed 50% of every dollar over the threshold. The Yankees were taxed $29.1 M this past season, which is a record. They have also paid $253 M since 2003. You can understand why they’re trying to get under the $189 M threshold for 2014 — they don’t want to pay additional fees that don’t go to helping their club.

One confusion that always comes up, and is sure to come up at some point in this situation, is where the luxury tax money goes. It does not go to small market teams. That is revenue sharing. The luxury tax goes to MLB’s central fund and isn’t redistributed to teams. So Coonelly’s motivation wouldn’t be fueled by getting more money for teams like the Pirates. If the Yankees had to pay more in luxury tax, the only financial benefit would be seen by the league. The motivation for Coonelly would be to limit the spending by closing a loophole for the Yankees.

The Yankees are trying hard to get under that $189 M payroll, and one way to do this is to sign a guy like Tanaka. They can technically pay $100 M+ like Matsuzaka and Darvish, but only half of that counts against the luxury tax. This is a better alternative to spending $100 M on a free agent, where the entire amount would count against their luxury tax. Under the proposed system, the Yankees can make an extreme bid, knowing they wouldn’t have to pay luxury tax on that bid. They also wouldn’t have to pay the high bid, since the new proposal averages the top two bids.

Of course the proposal by Coonelly was opposed by the Yankees.

Randy Levine, the president of the Yankees, objected to Coonelly’s proposal and asked rhetorically if other rules for international player procurement — like the way Cuban stars have been signed — should be changed midstream as well.

That’s an odd statement to make, since the rules are currently being changed for the posting process for Japanese players. This seems like the perfect time to make a rule change.

The biggest opposition to a rule change is the player’s union.

Rob Manfred, baseball’s chief operating officer, explained in the meeting that the players union had rejected proposals that would have tied the fee to the luxury tax. The union has no interest in rules that limit a team’s ability to spend.

If the posting fee went against the luxury tax, that would limit what the Yankees could spend elsewhere. As previously mentioned, the Yankees can bid $50 M on Tanaka, and it wouldn’t count against the luxury tax. That means they’ve got additional money to spend on free agents.

Coonelly’s proposal would force MLB to re-open CBA discussions with the player’s union, and would ultimately result in less money available for the players. The union would reject this, unless MLB came up with a way for the union to receive more money. That would be a difficult negotiation, and it doesn’t seem that baseball is interested in opening that door.

The truth here is that MLB is changing the posting system to keep more money in the game. That is their only concern. They’re not concerned with small market teams, or the fact that the newly proposed system just gives a bigger advantage to teams like the Yankees. So it’s great to see Coonelly fight back against this system, but the odds of this fight being successful are slim, since MLB and the player’s union would both be fighting on the side of the Yankees. The end result is that MLB continues to make it easier for large market teams, while killing the soul of small market fans who are holding on to a small hope of their team ever having a chance to win it all.

  • Oooooh, the New York media….and of course they’re sitting in on strategy meetings with the Yankees?
    Comical that I still know of noooo player they’ve signed or posted to date that they’re abusing this unfair rule of baseball.
    How is it unfair when they haven’t abused it? And it’s within the rules so IF they post the Japanese pitcher which would be the first time since when?? Not exactly abusing a loop hole. I’m missing something more than likely. Your headline should have said dodgers instead of Yankees as they’ve spent quite a lot of money on international players.
    As for frank…. Will someone ask him about the huge tv deal HE negotiated his first yr as president.

    • It’s pretty common knowledge that the Yankees are aiming to sign Tanaka because he doesn’t have a big impact on the luxury tax. It was even in the article linked above. If you want to ignore this, then that’s up to you.

      • Does it make anyone wonder why the Luxury Tax was implemented in the first place? Tanaka is worth $100 mil, but not if that team would have to pay $50 mil in Luxury Tax. If you allow big money to continue to pay whatever they want to get the top players and then use a loophole to get more, where does it end? The Luxury Tax is there for a reason – eliminate loopholes and maybe that team will not buy players for $250 mil or $200 mil, and on and on and on until their annual salary gets around $200 mil. Every low and middle market team should be standing right behind Coonelly and fighting for their basic rights in the future.

  • Why is frank fighting the Yankees to begin with? Why isn’t he fighting the dodgers or rangers? Haven’t they been the two teams signing the international players lately? I can’t even remember the last player the Yankees outbid everyone on internationally.

    • It’s pretty much every big market club. However, the luxury tax issue only impacted the Yankees and Dodgers in the last year. Also, the Yankees have been taxed the most for their spending, and they’re using the posting fee as a way to spend on talent and get around paying luxury tax money.

      • I haven’t read who they signed by using the posting fee…. To get around paying luxury tax? Who are all the players they’ve been signing to get around this luxury tax??

        • Pretty much everyone in the New York media has been reporting that the Yankees would rather spend big on the posting fee to get Tanaka this off-season, because the posting fee allows them to spend on players without paying luxury tax.

  • Bridgevillebuc
    November 17, 2013 8:22 am

    One way to counter an extreme high offer on 100m is to offer 99m, thus making any average savings go away…..loopholes to loopholes…

  • From a fan’s perspective, there is nothing that forces us to prefer Baseball over any other sport, or to choose a particular team to support over any other. From an economic perspective, those who are in the business of presenting exhibitions of baseball in return for money (and these include players, owners, agents, broadcasters, suppliers of goods and services, etc.) should support a business model that preserves and enhances the long-term appeal of the game.

    Naturally, every participant seeks to maximize the return from his investment whether it be in the form of time and effort developing his athletic skills, the financial investment of ownership, purchase of broadcast rights, etc. However, all must recognize that the long-term appeal of the game for fans — who are ultimately the source of all revenues — revolves around one question: Does the team I support have a realistic chance to compete?

    Currently, in my opinion, the answer is no; and a major reason is the maldistribution of resources and revenues between large market/high revenue teams and those who are not. This is the problem Mr. Coonelley is trying to address.

    Baseball, again IMO, is the most complex game ever devised by the mind of man. There are so many aspects to developing and maintaining a structure or business model which allows its franchises to be consistently competitive and thus deserving of continued fan support. As long as the ability of each franchise to compete consistently is based on its ability to find and develop its own talent, my solution to this problem would be to extend the idea of a posting fee to each club — Japanese, American, Latin, whatever — once a player reaches eligibility for free agency, and to ensure that posting fee revenues go to the club rather than to the MLB coffers. Formulas for determining the size of the posting fee and whether or not it is applied against the luxury tax simply do not address the problem of baseball’s currently anti-competitive business model.

  • Without the small market teams in Pro football where would they be?, lets face it if the big markets did not share with the Steelers and the Packers they would be in the same boat as the Pirates, Rays and Royals. Pro football recognizes it needs those teams, baseball does not realize they need the Pirates. I hope Frank makes some noise, although I think that is about all he is going to accomplish. I think the Pirates only chance in this unfair system is for the this terrific management team lead by Bob Nutting to continue with the system that they have, IMO, it will work well enough that they should be able to produce quality teams year after year.

    • The major difference in the NFL and MLB is the TV Revenue. Nobody is allowed to have their own TV Package such as exists in MLB for teams like the Yankees and Dodgers. MLB teams do share TV Revenue from the bidders such as TBS, Fox, ESPN, etc., but it is the “house” contracts that separate large market teams from the mid or low market clubs. The Yankees are one of the least popular national teams because they overspent on aging stars, and have almost zero young exciting players such as what the Pirates have. But their YES Network keeps pumping record profits into the franchise. The Pirates are building the all-american model and that will be very important for them in the future. When the Networks begin to schedule teams for weekly games, there will be a number of teams who will be popular and will assure a good audience. Pittsburgh is not one of the larger TV Markets so the popularity and success of the team will have to be the difference.

  • I enjoyed this article, this is public choice economics at its finest. The players union sides with large market teams because these firms set the price of the free agent market and players are going to go where there return is the greatest, it is self interest.

    What I do not understand is why the smaller market owners/teams accepted the restrictions on draft signing/international spending in the last CBA? Yes, it is cost control, but this was the one area where small revenue teams could invest relatively small amounts and build a competitive team, the only explanation is they accepted short term cost control while forfeiting potential long term revenue gains. This is understandable for owners want to maximize value in the short term because where owners truly profit is when they sell the team. However, I would love an better explanation for this.

    I know piratemike has lobbied hard for the draft order in the reverse of market size, I think this would create a structural imbalance given the quickly diminishing returns of draft slots. However, all competitive balance picks after the first round would be a welcome change and abolish free agent compensation, it serves no purpose.

  • The reality is baseball is struggling because its not a fair system, You say pony up or get out well if all the teams get out that can’t pony up (and thats over half of them) then the game as we know it goes away. 2/3s of the players go back to being minor leaguers. Baseball languishes outside of major cities and before long it falls behind soccer. As it stands now its heading down that path. To me its frustrating because I was raised in a time when the Bucs had as good chance as anyone to compete and they did. Today thats just not the case. The days of a player playing his entire career for team are over except in NY and Boston.

  • “…MLB and the player’s union would both be fighting on the side of the Yankees. The end result is that MLB continues to make it easier for large market teams, while killing the soul of small market fans who are holding on to a small hope of their team ever having a chance to win it all.”

    Same as it has been since 1994-5. MLB and the MLBPA created a baseball aristocracy which tends to employ a baseball player’s aristocracy. Even recently successful high-revenue teams (e.g. Cubs and Astros) find themselves compelled to follow the path established by the Pirates and Royals. Why would any administration devote tens of millions of dollars to win a few more games while still finishing below the McClatchy Line? It’s irrational to spend to be mediocre.

  • I found this article to be both funny and depressing at the same time.
    Frank, trying to fight the Yankees on behalf of other small markets. so they have a chance at international players from Japan. No, they are made because they’re getting screwed in the luxury tax the Yankees are paying. So Frank is fighting for MORE money for the Nuttings.
    I say to MLB take away the luxury tax, why should the Yankees give Welfare money to the Pirates and other small market teams, and force teams like the Pirates to either pony up or get out!!!

    • “One confusion that always comes up, and is sure to come up at some point in this situation, is where the luxury tax money goes. It does not go to small market teams. That is revenue sharing.”

  • From a purely business standpoint MLB is doing the proper thing.
    Who brings in the most money to the business? Of course the larger markets.
    Who would bring more interest (which translates to more revenue) for a World Series ?The Dodgers vs. Yankees / Boston or Tampa vs. Brewers?
    That is why MLB puts on happy faces and “celebrate” when a team like the Pirates make it to the playoffs ” see the system works.”
    Is it fair from a competitive standpoint …no….. but as long as they make more money this way the large market teams and the Union will not allow for a more level playing field.
    The reason I have argued for a permanent high draft pick positions for small market or low revenue teams is that it doesn’t effect revenue for players ( hence the Union ) and teams like the Yankees rarely draft below 20 anyway but it does make small market teams that have good ownership and wants to win more competitive longer and large market teams would fight and win against it unless public opinion brought a really negative campaign against MLB.

  • Not really grasping the positions being attributed to the union. If the Posting Fee cannot be a part of the salary for Revenue purposes, then what do they gain? If the Yankees can get this benefit and sign the kid from Japan, then a guy who has been playing in the majors and is now a Free Agent will not get that offer. It just costs a FA from getting a higher offer. And, if by doing this, only those few teams who have the big bucks would be the only ones involved. The other 20 to 24 teams would be precluded from participating therefore limiting the number of teams only means lower salaries for all the small market teams. Improving the ability to participate tends to develop a plateau for more teams – maybe 10 or 12 rather than 4 or 5 and means that many more teams will be between $100 mil and $150 mil. So, that means more players getting the benefit.

    Baseball is making a comeback, but it seems as if they are too tied into the old habits to help themselves. And, the old used car salesman from Milwaukee is not able to see how to provide more balance. The Supplemental picks in the draft and this inequity in FA’s from Cuba and Japan is ridiculous – they have limited the amount of money to be spent in the US Amateur Draft, and the International Draft, but Cuba and Japan are somehow different? There are ways to govern this, but the league would have to have the stones to make rules to equalize opportunities.

    • Let’s say the Yankees spend $50 M posting for Tanaka, and $50 M to sign him. Also, let’s assume he signs for five years to make it easy. For luxury tax purposes, that means the Yankees would be spending $10 M per year on Tanaka. If the posting fee counted, they would be spending $20 M.

      Under the current system, the Yankees could sign Tanaka to the above deal, then sign another player for $10 M per year and they would have $20 M towards luxury tax. If luxury tax counted, they wouldn’t be able to sign that second player for $10 M per year.

      • Tim: Is it important that the Yankees can pursue more players for top dollars? That second player that they would not go after for $10 mil could possibly go to another team for $10 mil. The more teams involved, the more each player benefits. They took away the Pirates “sandbox” of overpaying mid-draft HS picks to sign them away from college – that was in accordance with the rules of the draft at the time, and the Pirates made teams like the Yankees look stupid when they signed Josh Bell. They closed that loophole – is this any different?

        From the union standpoint, these are players from Japan and Cuba who are not union members? If the price was too high, maybe less players would be purchased in that manner. Are these not International Players? In actuality, Cuba and Japan are operating and maintaining Farm Systems for only the very rich. The posting fee supports the continued operation of that Farm System. If the Yankees or Texas or Boston, etc. sign folks like this, why not take their first 2 picks in the Amateur Draft?