What did the players achieve in the CBA?

Belying many forecasts of a prolonged stoppage, baseball got a new collective agreement without the loss of any regular season games. Despite widespread discontent about the offseason market by players, as player salaries stagnating and then declining from the 2017 peak while the median salary is down a staggering 30% in the face of continued strong revenue growth, in the end they settled for a deal that largely preserved the status quo.

Strategically, I thought the MLBPA was right to focus on the big picture issue of incentivizing maximal competition rather than structural changes that would require overturning the status quo and be fiercely resisted. Beyond widespread tanking being bad for baseball, it’s not a coincidence that the worst of those offseason freezes occurred when a lot of teams weren’t trying to make themselves better on the field the next year.

On the the flip side, the much more robust of the past offseason was driven by many mid-market teams looking to aggressively upgrade. It’s not just the top-end of free agent market either: strong demand for marginal wins meant many fewer non-tenders than the past couple seasons, when quality players were cut loose to further exacerbate the open market glut.

The major reform here is a draft lottery like what most other major sports leagues have. And while at the margin it moves things in the right direction, I’m skeptical it makes much of a difference. It’s still the case that the worse the record, the better the odds of a higher pick, and doesn’t address the more fundamental issue driving tanking (with revenue sharing and large streams of locked in media revenue, there’s little payoff to wins between 60 and 80). The MLBPA proposal to lock out repeat offenders from the very top would have been more effective, but it’s understandable they didn’t prioritize it and it didn’t get traction.

Instead, beyond service time manipulation, the negotiations coalesced pretty quickly down to the nuts and bolts of pecuniary specifics: how much to raise the minimum salary, how much to raise the Competitive Balance Tax (CBT)/de facto salary threshold threshold, and how to get younger players paid more in line with their performance before they hit the market.

The $50-million bonus pool for pre-arbitration players is a real gain for young players, but on the other two fronts the results are much less impressive than the headline numbers suggest. On paper, the MLBPA achieved gains,

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Minimum salary

In 2022, the minimum salary will increase from $570,500 to $700,000, a substantial 22.6% bump. In the four years afterward it rises to $780,000, or just under 3% a year. On the face, this does indeed seem like a “substantial increase” as the MLBPA claimed, and from which many players will benefit.

The first potential issue is whether these increases will prove to be significant in terms of purchasing power in the real economy. Inflation currently in the high single digits erodes almost half of that initial bump. There’s a real possibility that inflation persists in the medium term and ends up averaging above 3%, which would leave the players worse off.

Beyond that, general inflation is not the proper measuring stick. That would instead be MLB revenue, which is what the players generate and has risen much faster than inflation (since the Blue Jays started play, the price level has multiplied five fold, whereas MLB revenue has increased 45-fold from under $250-million to above $10-billion).

Take the last collective agreement. In 2017, the minimum was raised from $507,500 to $535,000 (5.4%), and by roughly the same again over the last four years. Overall, that barely exceeded a 2% inflation target, but meanwhile MLB revenues increased almost 15% by 2019. This pandemic complicates extrapolating beyond that, but this is a broader trend across time:

The cycle is pretty clear: after significant revenue growth, the players negotiate a significant one time increase in the league minimum to roughly catch up the revenue growth, and then generally small subsequent increases. Then, with few exceptions, the “real” value of the minimum is subsequently eroded by revenue growth in a couple years. Rinse, wash, repeat.

The 35-fold increase in the minimum from $16,000 in 1975 to $570,5000 in 2019 sounds fantastic and a major win for players. But over the same period, MLB’s reported revenues increased by twice as much more at 65-fold, from just over $160-million to over $10-billion.

As the chart above shows, there was no single period this relative loss occurred, though naturally there were better and worse periods. Rather, it’s more attributable to the accumulation of small shortfalls compounding over 44 years.

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Automatic links to revenue growth

This points to a structural negotiating disadvantage for the players. As long as there’s at least moderate revenue growth, when it comes to nominal figures in the CBA they lose ground passively which then has to be won back at the negotiating table. Just maintaining and restoring the real status quo takes significant negotiating capital, which could otherwise be used to achieve real gains in other areas.

In my view, mitigating this pernicious cycle would be a much more significant win in the longer term than any one time increase that history has shown time and again to be an ephemeral win. This wouldn’t even be complicated, just a provision that future increases in the league minimum is tied to the previous year’s revenue growth.

in fact, there is recent precedent for exactly this approach. When the two sides negotiated the hard amateur spending caps in the 2011 CBA, the total amounts for each year were tied to (trailing) revenue growth, and that was carried over to the 2017-21 deal (and presumably into this one). It’s somewhat ironic that the players negotiated better terms here for non-members than an area critical to significant portion of its membership.

Critically, like other core part so the CBA, this would become the baseline in future deals, and allow the players to use any leverage to focus on real gains elsewhere. Or if they choose to expend negotiating capital on the minimum salary, it would be for an enduring real increase. There were plenty of things the owners badly wanted this time around, and what else could have been achieved if it wasn’t spent clawing back lost ground.

Consider that if the minimum had just grown in line with MLB revenues since 1975, it would already be over $1-million. Even just starting in more modern times from a year 2000 baseline it would have already reached $625,000 in 2019 just matching revenue gains, and would reach $780,000 in 2026 with revenue growth of about 4% a year from 2019 (with the media rights locking most of this in already).

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How the CBT Threshold became a de facto salary cap

The same principle applies to adjustments in the CBT thresholds, the second of three areas the MLBPA focused on and trumpeted gains. Here the story is actually even worse, and a significant part of why it has become a de facto salary cap. Even more than the minimum salary, the proper metric is relative to team revenues, since competitive balance is inherently a function of revenue generation.

When the CBT was agreed to in the 2002 collective agreement, it was set at $117-million for 2003. That amounted to roughly 90% of the average team’s revenue for that season (a little higher if we looked at trailing revenues, since it always has to be set prospectively). The deal also set annual increases, reaching $136.5-million for 2006, an increase of 17% or just over 5% a year.

Given economic softness at the time that slowed down MLB’s revenue growth from 2000 to 2002, those were actually quite robust increases written into the deal. However, MLB revenue growth exploded, growing by over 30% in three years to exceed $5-billion by 2006. Thus, the threshold increases significantly undershot revenue growth and in real terms became much “tighter” as they amounted to just ~80% of the average team revenue.

Even so, it probably still wasn’t a huge concern for the MLBPA, as it only affected a few teams and salaries were rising strongly. In the subsequent agreement for 2007-11, there was a bit of an immediate bump up to $148-million (8.4%), followed by annual increases of 4.5-5% to $178-million for 2011. In the first half of the agreement, that kept that threshold around 80% of average revenue, and then as the Great Recession slowed revenue growth actually increased it to 84% for 2011.

This is where the MLBPA got complacent. They allowed the threshold to remain at $178- million for two years, before bumping up $189-million. Given that there will be an inherent lag, that wasn’t unreasonable to reflect the fallout of the financial crisis, but leaving it there for the last two years was a mistake. Over 5% years, the threshold only increased by 6%, or just over 1% a year.

Meanwhile, MLB revenues re-accelerated. Over the same five years of the next CBA, they grew by 40% to around $9-billionby 2016 fuelled by huge growth in cable TV contracts. As a result, the CBT threshold plummeted to just about 63% of the average team’s revenue. This was the point were the CBT went from affecting only the mega markets to a factor for more “upper-middle” market teams.

Whether they didn’t grasp the implications or lacked the will to dig in their heels, the MLBPA didn’t roll this back in the last agreement. In fact, they actually let the situation get worse because while they negotiated an increase of 11%, once again that was well short of the revenue growth that was baked into the cake. By 2019, the ratio was down to about 60%, and that was with most of the increases reflected. If not for the pandemic, the situation would have probably got worse in 2020-21.

So what about the increases that the MLBPA achieved? For 2022, the threshold jumps by $20-million to $230-million, which is not insignificant. If we assume that MLB revenues in 2022 somewhat exceed the 2019 peak (media rights continue to rise), then the CBT/revenue ratio should rise back to around 65%. So, that’s something.

But the key is the next four years, during which is only increases by a total of another 6% to $244-million. The overall increase is 16%, or just 3% a year on average. With long term TV contracts locked in, unless in-stadium revenue is hugely depressed, that’s almost certain to undershoot revenue growth. Meaning the CBT becomes even more of a de facto salary cap.

In other words, the “gains” in increasing the CBT thresholds will likely be entirely ephemeral. By the end of the deal, in real terms relative to revenue, the thresholds will likely be right back to where they were in 2017-19. And perhaps even lower if MLB revenue growth ends up even stronger. At which point the MLBPA will once again be in the position of negotiating “increases” just to reflect revenue growth.

At this point, from the MLBPA perspective, a lot of the damage has already been done, and reversing the status quo will be a huge lift. The initial threshold (the least restrictive relative to team revenues) wasn’t an infallible number, and perhaps too high for optimal competitive competitive. But clearly, somewhere between 90% and 60%, it turned into a de facto salary cap.

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Linking various thresholds to revenue growth may seem like anathema to the MLBPA given their historic principle of refusing to link revenues and salary, but it’s a far superior alternative to constantly losing ground. If players didn’t like being reduced to a $4-billion piece of a $10-billion pie, there’s a very good chance come 2026 it’s something like a $5-billion piece of $15-billion pie.