New Collective Bargaining Agreement reached in MLB: Labour Peace in our Time

by Graydon Ebert

On Tuesday, Major League Baseball and its players announced that they had reached a new five year collective bargaining agreement which will ensure labour peace until the end of the 2016 season. In comparison to its professional sports brothers in the NHL, NFL and NBA, MLB and its players consummated this deal quietly without the acrimony we have seen in recent labour negotiations in these other leagues. When we look at this deal, it becomes clear it is one of compromise, with each side getting and giving on specific issues. Here’s our breakdown of the key changes.

Realignment and Postseason Play

As has been reported for some time, there will be an additional wild card in each league, possibly starting next season. The two wild card teams in each league will play a single game with the winner to advance to the Division Series. Starting in 2013, the Houston Astros will move to the AL West to allow for 15 teams in each league and to make the schedule work interleague games will be played throughout the entire season.

It seems clear this is something both sides wanted to do. Both the league and the players wanted to add an additional playoff team to generate interest and the players especially wanted to even out the divisions, as previously teams in the AL West only had to beat 3 teams to make the playoffs and teams in the NL Central had to beat 5. This makes it slightly fairer across the board. It still remains to be seen how the schedule will work with interleague games all year, and whether the league will continue to maintain an unbalanced schedule but two additional playoff teams per league should keep more teams playing meaningful games longer. It will have the effect of making winning your division much more valuable as teams will want to stay out of that single game playoff.

HGH Testing

Beginning in 2012 players will be subject to HGH blood testing for reasonable cause during the year and all players will be tested during Spring Training. Starting the next year, players will be subject to random unannounced testing in the off-season and MLB and the players have agreed to look at expanding the program to include in-season testing.

Despite the fact that the players have expressed in the media that they want HGH testing to illustrate that the game is clean and if you ignore the fact that many have expressed the belief that HGH testing is not important, this is still a significant give by the players to the league. The union, under Donald Fehr, long held concerns about the violation of privacy of the players that would occur if they were subject to blood testing by their employers. Think about it this way. Would you feel comfortable if your employer could, at a random time, require you to take a blood test and could suspend you if that test showed you had been drinking or using drugs? The players decision to agree to this testing is indicative of a strong desire by the players to clean up the league once and for all, or of an understanding that maybe HGH is not very prevalent at all. HGH testing allows MLB to be proactive about HGH and for a league with a horrible drug problem in the past, it gets to be seen as a league that is out in front on this issue.

Free Agent Compensation

Under the previous CBA, free agents were ranked according to a system devised by Elias Sports Bureau. Free agents in the top 20% of all players in their position were “Type A” free agents. If a “Type A” free agent was signed by a new team, the previous team was entitled to the first round pick of the team that signed him (subject to some exceptions) and a compensatory draft pick between the first and second rounds. Free agents in the next 20% of were “Type B” free agents and teams that lost a “Type B” free agent were entitled to a compensatory draft pick between the first and second rounds. All other free agents could be signed without compensation.

Starting next season the compensation system has changed. The use of the ranking system has been eliminated. Free agents will be subject to compensation only if the previous team offers him a guaranteed one year contract with a salary equal to the average salary of the 125 highest paid players from the previous season (last year this amount was $12.4 million). If the free agent signs with another team after receiving this offer, the previous team will be entitled to the first round pick of the new team (unless that team picks in the top 10, then it will give up its next highest pick) and a pick between the first and second rounds.

These changes are beneficial for the players as they should open the free agent market up and encourage more free agent spending. The real purpose of free agent compensation is to help smaller market teams that lose their top end players to free agency by giving them top end draft picks to rebuild their team. However, one of the big problems with the old system is that too many free agents were subject to draft compensation, especially relievers, and teams were unwilling to give up a first round pick to sign them or would only if they got a bargain on the free agent. This acted as an artificial restriction on a player’s market in free agency.

A good example would be Toronto Blue Jays reliever Jason Frasor. Frasor, last year was a “Type A” free agent. The Blue Jays offered him arbitration in hopes he would sign with another team and they would receive two high compensation picks. Frasor, a good pitcher but only a middle reliever, did not receive an offer from another team that was for more money that he could get in arbitration because teams did not want to give up its first round pick for a middle reliever. He accepted the arbitration offer and signed a contract for less than he would have got on the open market had there been no compensation requirement.
Now, with the requirement of an offer in excess of $12 million required to get compensation, only top level free agents will garner compensation, which is really the purpose of a compensation system. Logically, losing a middle reliever shouldn’t give a team two top sixty picks. Teams that had been clever in picking up “Type B” free agents on the cheap to buy top 60 picks will no longer be able to game the system

Draft and International Free Agents

The biggest changes in the CBA are focused on how money can be spent on players selected in the amateur draft and on international free agents (amateur players from countries other than the US, Canada or Puerto Rico who are not eligible for the draft). For years MLB has wanted to limit the amount of signing bonuses that could be handed out to amateur players. In the past it has recommended the signing bonus that should be given out for each pick in the draft and has for some time wanted to make turn these recommendations into hard slots, forcing each player to sign for the bonus attributed to where he was picked. The players have resisted this, as they oppose hard capping of any salary or bonus. There were similarly no restrictions on how much money teams could spend in the international free agent market.

The new CBA introduces a punitive luxury tax style system which should have the effect of limiting spending on bonuses given to drafted players and international free agents. In the draft, each pick in the first ten rounds has been assigned a value, which has been negotiated in the agreement and will increase based on revenue growth. Each team is then given a total amount they can spend on bonuses based on the picks they hold in the first ten rounds. A bonus given to a player selected after the tenth round will not count towards this amount as long as it is under $100,000. Teams are allowed to exceed their total bonus amount but it will be subject to strict penalty. Overspending of 0-5% will result in a 75% tax on the amount overspent. Overspending of 5-10% will result in a 75% tax on the amount overspent and loss of a first round pick. Overspending of 10-15% will result in a 100% tax on the amount overspent and loss of a first and second round pick. Any overspending over 15% will result in a 100% tax on the amount overspent and the loss of two first round picks. All the tax amounts will be distributed to the teams that collect revenue sharing and did not go over their draft spending amount. The lost draft picks will be awarded to other teams by lottery to teams that did not exceed their draft spending amount with the odds based on team’s prior season’s winning percentage and revenue.

Similarly, each team is allocated a total amount they can spend on international free agents (equal at first, and then based on the results of the previous season). Teams will be able to trade a portion of their allocation to other teams. A tax system, structured along the lines of that for the draft will apply to teams that spend over their allocation.

In addition to the new bonus spending limits, the signing deadline for drafted players has been moved up from the end of July to a date between July 12 and July 18. A new wrinkle, called the Competitive Balance Lottery has also been added to the draft. Now the ten teams with the lowest revenue from the previous season and the ten teams in the smallest markets will be entered into a lottery for the six draft picks following the first round, with the odds based on the previous season’s winning percentage. There is a second lottery for six draft picks following the second round with the teams not winning a selection in the first lottery being eligible along with all other teams that collect revenue sharing. Unlike all other draft picks, picks acquired in the Competitive Balance Lottery may be traded to other teams, subject to certain restrictions.

Moving up the signing deadline is generally considered a positive development. Recently players have been waiting until the last minute to sign to build their leverage, especially high school players who have commitments to attend college, and moving up the deadline allows these players to wait until the deadline but still get signed early enough that they don’t have to wait until the next season to really start their pro career. The Competitive Balance Lottery is an interesting novelty and innovative way to help out smaller market teams, but since spots in the lottery are based on teams’ revenue we may see some creative accounting on the part of some teams to get into that lottery when they may not really deserve a spot.

The draft and international free agent spending limits are a clear win from MLB’s perspective. While not as restrictive as a hard capped system, the penalties are so punitive that teams are unlikely to overspend their total bonus amount by a significant amount (the values of the total bonus amounts are yet unknown but unless they are a significant amount above the previous draft slot recommendations, draft spending will decrease). While saving money is the main goal for the owners with these limits, the league has voiced concerns in the past that small market teams have been forced to not draft the best player available because of signability concerns, which allowed big market teams to draft players of a better quality. Spending limits, at least theoretically, should allow small market teams to compete with big market teams for amateur talent in the draft and in the international free agent market.

Unfortunately, in reality these spending limits will have negative consequences both for small market teams and the league as a whole. By attempting to achieve more competitive balance through the draft, it is likely that the opposite will occur. Small market teams can rarely compete with big market teams in the free agent market, the money given to free agents is to prohibitive. However, several smaller market teams have learned that being aggressive in the draft and giving larger bonuses to multiple players with premium talent, some of whom they will be able to control for comparatively cheap once they are major leaguers, is an efficient way for them to spend money and have a chance to compete with the big market teams. Some team will pay Prince Fielder over $20 million a season to be one player on their team. In last year’s draft the Pittsburgh Pirates spent a record $17 million on their entire draft, including #1 overall pick Gerrit Cole. If two or three of those players make it to the major leagues and have an impact, Pittsburgh will control their rights for 6 years at an amount likely to be less than market value. For a small market team this is a much more efficient use of limited resources. This is why from 2007-2011, the top ten teams in draft spending were the Pirates, Nationals, Royals, Red Sox, Orioles, Rays, Blue Jays, Mariners, Padres and Diamondbacks. Other than the Red Sox, these are all small or mid-market teams. Limiting draft spending will limit these teams ability to use their resources in an efficient manner. The international free agent market, for the same reasons, is another means for small market-clubs to efficiently buy young controllable talent. If they cannot out-compete big market teams in the draft or international free agent market, they might be forced to take more risks in the free agent market to compete, and mistakes in that market hurt a team a lot more than mistakes in the draft.

These spending limits may also have the unintended consequence of reducing the amount of premium athletes that choose baseball over other sports. A recent example would be Bubba Starling, a high school outfielder taken in the first round of the past draft by the Kansas City Royals. Starling, by all accounts, is a tremendous athlete who should be an impact player for the Royals in the future. Starling was also offered a scholarship to play quarterback at Nebraska. In order to ensure that he would choose the Royals over football at Nebraska, the Royals paid him a signing bonus well over the bonus amount recommended by MLB. In the new system, with lower draft spending, an athlete like Starling with similar choices in other sports may be less likely to choose baseball if the Royals cannot offer a lucrative signing bonus. In the international free agent market it could push players in Latin America towards soccer or other sports. Time will tell whether these spending limits will have a negative impact on baseball’s ability to attract top athletes. Teams may be able to give those top athletes the bonuses required to get them to commit to baseball but it may be at the expense of not signing several other promising players.

Other Key Changes

While the limits to draft and international free agent spending were a big concession by the players, they did gain some other concessions from the MLB. The minimum major league and minor league salaries will increase. The major league minimum salary, at $414,000 in 2011, will increase by about $100,000 over the life of the deal. The luxury tax threshold, which in 2011 was $178 million, will stay at the same level until 2014 when it will rise by $11 million. Typically, since the luxury tax has been introduced, only the Yankees have consistently spent above the threshold. By not lowering the threshold, it ensures that this will likely continue and the players do not have to worry about the luxury tax being a significant constraint on player spending. Finally, there was a tweak to arbitration rules such that an additional few players every year will be eligible for salary arbitration.

Overall, how do we evaluate the deal?

This CBA is the obvious product of a strong league without any contentious structural problems or revenue shortfalls. Each side got some things that they wanted, and gave on some things as well. That much of the debate is about changes to the draft or free agent compensation rather than about teams losing millions of dollars or how revenue will be shared is illustrative of a strong league. Revenue is growing due to MLB’s advances in new media and larger regional television deals and the league revenue sharing is keeping the league strong as a whole. Clearly the players and the MLB see the value in continued labour peace with no work stoppage. After the acrimonious relationship between the players and the MLB in the 30 years prior to the 1994 strike, it would have be unfathomable to think that baseball would emerge as the league with the most labour stability but in 2011 this is the reality.

From the player’s perspective, this deal is a positive. Baseball continues to be the only sport without a salary cap, and while baseball players receive the lowest percentage of revenue in fact, the lack of any upward restriction on player spending means that big free agent deals and contract extension will only continue to increase in value. The changes to free agent compensation, minimum salaries, and salary arbitration will also act to increase player spending on a league-wide level. The limits on draft and international free agent spending are a significant concession by the players. However, they resisted a hard cap on player spending, both in the aggregate and on a player-by-player basis which shows their resolve to not allow a cap of any sort on player spending. Further, these limits have no impact on veteran players who make up the union and only impact future players entering the system who are not yet a part of the union. So, as is typical in collective bargaining, the current players’ gains were built on the backs of future players.

The deal is also positive for MLB. While it continues to not have a salary cap, it does pay its players the least amount of revenue of any of the sports, and this is likely to continue. Revenue is growing and there will be no labour stoppage to impede that growth. Expanded playoffs will keep more markets engaged in the season longer. HGH testing, is at least from a public relations perspective, a positive for a league trying to clean up its image in the public. The draft and international free agent spending limits are something that the MLB has been coveting for a while and these punitive systems should have an effect on curbing spending. While the efficacy of these limits may be questionable, from a crass cost-savings perspective, teams will be spending less in the draft and in the international free agent.

The sneaky winners of this deal may be teams like the Yankees, which if you are a fan of competitive balance is disappointing. The new playoff format will put a greater emphasis on winning your division, which means that it will be harder for small market teams to sneak into the wild card and pull an upset over a division winner as has happened in the past. Fewer free agents will require compensation, giving bigger market teams the ability to spend more money on more free agents without as much concern for the effect it will have on their future drafts. Draft and international spending limits will make small market teams less able to use their resources efficiently and aggressively in the draft and international free agent market which will eliminate one of the only ways that small market teams have been successful in competing with big market teams. Placing all teams on a relatively equal footing in the draft and international market will only make big market teams advantage in the free agent market that much more apparent.