Pirates Business: Competitive Balance Tax Changes

For as downtrodden and destitute as Major League Baseball franchises would like you to believe they are, a lot of money has been committed in free agency this offseason.

A lot a lot, like $3.8 billion a lot, and rising—I’m watching and hoping it reaches $4 billion, even if that’s probably a stretch, as we’ve reached the downslope as far as signings go.

No team has committed as much as the New York Mets—$807,166,666 million to 10 players—with their AL counterpart, the Yankees, second at $573,500,000.

The Mets were second, until some questionable medicals caused an agreement between Carlos Correa and the San Francisco Giants to go sideways, with the Mets swooping in to procure Correa’s services. The agreement has yet to become official, with more medical concerns possible, but for now, the team is reaching heights never before seen as far as payrolls go.

Estimates will vary, but best I can tell, Christopher Soto of Metsmerized is the go-to source for the best available Mets’ figures (a scroll through Christopher’s Twitter account is eerily similar to what you’ll find in mine, and I love it).

Currently, Soto has the Mets at a Competitive Balance Tax figure of $378,755,907, well beyond the $233 million tax line for 2023. Per Soto’s calculations, this would result in $106,580,316 worth of CBT penalties.

Of course, these numbers are just theoretical at the moment, but they have been causing a stir in the baseball world, as discussions will always pick up when teams spend this way.

The biggest topic of discussion is largely the tax bill—one that is more than the estimated payrolls for several teams, the Pittsburgh Pirates included. I’m not here today to talk about whether that’s right or wrong—though I’m not sure how fans have become so disillusioned by greedy owners that they think actually spending money on players is somehow wrong—rather, I want to examine what happens with that tax income, whatever it ends up being.

As part of these often-heated discussions around high spending, a common refrain I’ve seen is that the Pirates get to sit back and collect more money as the Mets payroll continues to climb.

While that may have been the case before, is it still?

As best I can tell, starting in 2017, teams who did not exceed the Competitive Balance Tax received a share of the proceeds from those who did—50% of the remaining total after $13 million went to defraying the costs of player benefit plan obligations. Doing some quick math, under that system, the Pirates would have received roughly $3.9 million from just the Mets’ penalties alone. Of course, this isn’t anything hard and fast, as it only includes the proceeds from one team and assumes the same number of teams over the tax in 2023 (six) as projected after 2022. It’s at least a good reference point for the discussion though.

As I’ve alluded to, however, change seems to be afoot.

Looking back through my hundreds of pages of notes from these past CBA negotiations, I found at least a few references to changes to the Competitive Balance Tax system:

Well, those vague allusions were all we had until recently, when Evan Drellich of The Athletic dropped these tidbits of information on Twitter:

If for some reason this isn’t clear, in layman’s terms, this is saying that the system from 2017-2021 has changed—teams no longer get to sit back and collect Competitive Balance Tax proceeds; they have to work for them. Payments will only be made from the Discretionary Fund to Revenue Sharing Payees attempting and succeeding in efforts to increase their Net Local Revenue by meeting certain benchmarks, as laid out above.

One of players’ biggest tenants in these past negotiations was incentivizing competition, proclaiming at the time that “[w]e continue to see Clubs openly choosing a model of sustained losing while still reaping economic benefit”. As you can see above, the new application of funds is “[i]n furtherance with the MLBPA’s efforts to incentivize Clubs to grow local revenue by providing a competitive on-field product” while “eliminat[ing] one of the previous incentives to stay below the CBT base threshold”.

I’ll circle back to the former, but the latter is an interesting wrinkle. Free agent spending had slowed way down in recent years, with teams weary of crossing the tax thresholds. While not a main reason, it’s at least plausible that teams saw the value in not exceeding the threshold and receiving a small sliver from those who did.

Six teams are believed to be Competitive Balance Tax payors after 2022, with only two crossing those lines after 2021. Six more teams are currently projected to be over for 2023, with one other pushing up against the line. Whether this new wrinkle had any influence on these changes in behavior or not, it’s unquestionably a good thing seeing teams spending on players and trying to win, and it appears that the new rule isn’t impeding that in any way, at least for now.

As for clubs “reaping economic benefit” while continuing to lose, this new rule, while small, is an important win for the players nonetheless. Yes, changes to the Revenue Sharing model and how clubs are forced to use those funds would have been far more substantial—as the funds themselves are far more substantial—it again is unquestionably a good thing that clubs need to actually try in order to receive the tax proceeds. Efforts to reduce Revenue Sharing received, increasing revenue despite market size, increasing attendance and fan engagement, and simply trying to win: these are all efforts fans claim to want from their teams and efforts that should be made by all teams, no matter the reward.

It’s unfortunate that they need incentivized, but it’s better than nothing. When the Pirates or any other team that’s not trying fail to see this small, passive income stream in the future, it’ll be due to this new rule.

Offseason Calendar Update

No updates here as of this week.

Pirates Payroll Updates

—As promised by Ben Cherington, the team agreed with another starter to round out the rotation, settling with Rich Hill on a one-year, $8 million contract.

A career journeyman of sorts, I count Hill at 13.124 years of service, surpassing Carlos Santana for most on the team.

To make room in my projection, I designated Yohan Ramirez for assignment and optioned Johan Oviedo. As a result, payroll went up $7,263,666.

This firmly puts the team in a position where they should exceed both last year’s starting ($60,114,300) and ending ($60,925,548) payrolls.

—For 2023, the payroll estimate stands at $68,282,197 for the Labor Relations Department, while it’s $84,698,864 for CBT purposes.

A longtime Pirates Prospects reader, Ethan has been covering payroll, transactions, and rules in-depth since 2018 and dabbling in these topics for as long as he can remember. He started writing about the Pirates at The Point of Pittsburgh before moving over to Pirates Prospects at the start of the 2019 season.

Always a lover of numbers and finding an answer, Ethan much prefers diving into these topics over what’s actually happening on the field. These under and often incorrectly covered topics are truly his passion, and he does his best to educate fans on subjects they may not always understand, but are important nonetheless.

When he’s not updating his beloved spreadsheets, Ethan works full-time as an accountant, while being a dad to two young daughters and watching too many movies and TV shows at night.

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RaisetheJollyRancherGirl

No wonder Bob spent $25M this year! He wants the $50M in CBT or whatever.

b mcferren

gotta spend money to make money

PirateRican21

I hope the Pirates and other teams that look forward to revenue sharing get absolutely nothing! That money has hardly been use to field a competitive team.

Anthony

Revenue sharing is the only reason there is a team in Pittsburgh.

PirateRican21

You mean is the only reason Bob has a team.

Anthony

No, I mean operating an MLB franchise in the city of Pittsburgh is financially unfeasible under its current economic structure without revenue sharing.

RaisetheJollyRancherGirl

https://www.sbnation.com/2019/10/30/20938397/bob-nutting-pittsburgh-pirates

$200M a year plus their TV deal and gates and concessions and merchandise. With payrolls bouncing from $35M to $70M, revenue sharing might be necessary but it’s also a really sweet deal for Nutting.

Anthony

…and every other revenue sharing recipient.

But seriously, look at the maths. The Pirates had about $260M in revenue this year, which was comprised of about $130M local revenue sharing (@ 48% of total local), $100M central revenue sharing, and the $30M local revenues (@ 52% of team local). If we remove local revenue sharing receipts, total revenue would fall from $260M to $162.5M. For the Pirates, the net impact of local revenue sharing is almost $100M.

The Pirates are not alone here, revenue sharing is imperative for about one-third of the league. This money allows revenue sharing recipients to “operate” as MLB organizations, which is why we don’t see 100% of funds being used on payroll.

RaisetheJollyRancherGirl

Naw, some of the others spend some of it.

Anthony

They are required to spend it, and they do. It’s only the MLBPA that thinks it should ALL go to payroll, which is ludicrous. We aren’t seeing the payees issue grievances against the recipients, and they’re the one subsidizing these clubs. If anyone has a grievance with where revenue sharing funds are allocated, it would be them, especially if they’re as megalomaniacal and greedy as most assume.

RaisetheJollyRancherGirl

Why would they air grievances—that welfare teams aren’t putting their handouts towards payroll—that actively create a system where their teams win more games? They never would!

Anthony

I’m not following you, you’re kind of all over the place.

You said some spend it, and I said they have to spend it. I assume you meant on payroll bc they are actually required to spend and document these funds. There would most definitely be grievances from the payees if recipients were not spending these funds and just pocketing the monies.

If the Yankees and Dodgers of the MLB were more concerned with winning games than making money, they would just eliminate revenue sharing altogether like the MLBPA proposed.

Last edited 24 days ago by Anthony
RaisetheJollyRancherGirl

You really think Nutting spends $100M a year on this team? I wish I had a bridge for sale just now.

Anthony

He absolutely does!! You’ve got to be joking; there is more to operating an MLB franchise than the 40-man payroll.

They almost spent $100M last year on payroll after you add in bonuses. This year they’ll be over $100M for sure with bonuses.

bscat

Of course he does . . . if he pays himself the lion’s share.

Anthony

He literally can’t do that…

Last edited 24 days ago by Anthony
RaisetheJollyRancherGirl

So the year our payroll was $36M, Nutting spent $100M on running the team?

Anthony

There was no local revenue sharing in 2020 and zero attendance, so they got their ass handed to them that year. My best estimate is they prob lost $35M-$45M, and yes, they spent well over $100M in operating expenses.

Last edited 23 days ago by Anthony
RaisetheJollyRancherGirl

Lol, ok. No chance.

Anthony

It’s rather apparent that you have no clue even how much money they actually spend each year on payroll, bonuses, and benefits. This is all readily accessible information that only requires a bit of reconciliation between sources.

Their payroll with bonuses in the shortened COVID season with ZERO attendance and NO local revenue sharing was roughly $50M, not $36M. And, their pro-rated portion of MLB central fund revenues and their local media deal was only about $53M, just barely enough to cover payroll (and doesn’t include payroll taxes). This is before you even begin to account for ALL of the fixed (and remaining variable) costs related to operating an entire MLB organization. Why do you think MLB expanded their credit facility by nearly $3B, yes with a “B”, that year? This should be rhetorical, but I think your having trouble with these concepts; it was to provide teams with access to credit for the purpose of funding unprecedented operating losses.

RaisetheJollyRancherGirl

The books aren’t public and never will be. You’re just guessing at pro-Nutting takes haha.

Anthony

There is more than enough data out there from credible sources to make extremely reasonable and reliable conclusions. And just bc the results do not support your anti-Nutting bias doesn’t mean I’m pro-Nutting.

It’s one thing to have an opinion, but it’s another to anchor on an unsupported and predetermined bias; that’s just conjecture.

RaisetheJollyRancherGirl

I don’t think you can confirm those numbers. If they could be confirmed, they would have been by some journo looking for clicks.

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