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March 20, 2002

March Madness

Has Selig Gone Too Far This Time?

by Doug Pappas

The second week of March may have marked a permanent change in Commissioner Bud Selig's status. He's no longer simply an incompetent, lying, permanently conflicted embarrassment to an office once held by judges and senators. Unless the owners who hired him wake up in time to stop him, Czar Bud will have become an active threat to their own wallets and a walking advertisement for the repeal of MLB's anti-trust exemption.

Give Selig credit for planning his coup. Last November 27, just days after announcing that under his leadership MLB had purportedly lost $519 million in 2001, Selig called a meeting for the sole purpose of giving himself a raise and a three-year contract extension. He forced out MLB President Paul Beeston, widely seen as a moderate on labor issues, replacing Beeston with his own personal lawyer. Selig also broadened the owners' traditional gag rule on labor issues, enforceable through fines of up to $1 million per incident, to bar clubs from discussing labor matters with one another.

Think about that for a minute. In a multi-billion-dollar industry whose largest investors include Disney, News Corp., AOL Time Warner, and the Tribune Company, a car dealer from Milwaukee not only dictates labor policy, but forbids his employers from discussing the wisdom of his chosen course among themselves. The Iraqi Parliament has more freedom.

Now, with two mind-boggling decisions, Selig has made clear just how much he intends to abuse his absolute authority.

One of these decisions is tucked into the details of the owners' revenue-sharing proposal. In 2001, 20% revenue sharing resulted in the transfer of $166 million from high-revenue to low-revenue clubs. The owners now want 50% revenue sharing, which they say would transfer $253 million, based on 2001 revenue numbers. That doesn't add up: if 20% of revenues is $166 million, 50% should equal $415 million. Some of the difference may be attributable to a change in the revenue-sharing formula which would give proportionately more to medium-revenue clubs, but for most of it, there's a more ominous explanation.

As this article on MLB.com explains, the owners' formula would withhold $100 million of revenue-sharing receipts from the normal distribution. This money would be deposited in what the article describes as "a $100 million discretionary fund at Commissioner Bud Selig's disposal."

That's right: a $100 million slush fund for Selig to use as he pleases. To put this number in perspective, it represents 3.5% of MLB's total locally-generated revenue in 2001. It's more than the world champion Diamondbacks' local revenue from the regular season; as much as the Astros generated in their new To Be Renamed stadium; and more than the total revenues of 11 clubs. All for Bud to share with his supporters and withhold from anyone who stands in his way. Can teams like the Yankees, Mets, Dodgers, Mariners, and Rangers really be stupid enough to let this happen?

Incredibly, this wasn't even Selig's most outrageous act of the week. That came when he announced that he planned to enforce MLB's long-ignored 40% debt-to-value limit as of June, using arbitrary, economically illiterate definitions of "debt" and "value" that will permanently cripple at least two clubs and damage a dozen more for years to come.

Selig arbitrarily decreed that all clubs will be valued at twice their 2001 revenue, less the amount of their revenue sharing payments. As Joe Sheehan has previously noted, recent franchise sales suggest that this estimate is far too low. As ESPN's Jayson Stark observed, subtracting the revenue-sharing payments means that the highest-revenue clubs will be "valued" at much less than twice their value. Clubs have the right to appeal this arbitrary valuation, but only to an appraiser selected by Commissioner Selig.

On the other side of the equation, a club's debt clearly includes money borrowed by the owner to finance his purchase of the club or to cover operating losses. It also includes the present value of deferred payments in a player's contract, a special problem for the Arizona Diamondbacks. For services rendered from 1999 through 2002, the Snakes will owe Jay Bell, Steve Finley, Randy Johnson, Todd Stottlemyre, and Matt Williams alone more than $70 million in deferred payments, plus interest--money which will have to be paid after they retire, in addition to the salaries due everyone then on the team. These categories of debt aren't controversial.

But Selig has expanded the definition of "debt" to include the present value of all long-term contracts. For example, when Alex Rodriguez signed with the Rangers before the 2001 season, the present value of his contract was about $165 million. Under Bud's New Math, the final eight years of the contract are retroactively treated as a "debt" of more than $130 million. Because Selig's formula values the Rangers at about $261 million, A-Rod's contract alone puts the Rangers in violation of the 40% rule, and there's not a damned thing the club can do about it. Even releasing Rodriguez outright wouldn't help, since his contract is guaranteed and no one else could risk assuming that much "debt."

Even worse, this rule penalizes clubs with the foresight to lock up their young players through their arbitration years. The A's, who in August 2000 signed Tim Hudson to a contract running through the 2004 season, just exercised his option for 2005. The $13.25 million Hudson will earn from 2003-05 is probably half of what he'd command from a series of one-year contracts, so the signing is a bargain for Oakland...yet it represents almost 25% of the Athletics' $60 million of allowable "debt." Only someone fundamentally ignorant of baseball economics could devise a scheme that uses an arbitrary debt ceiling as a weapon to force teams to pay young players more money.

ESPN estimates that, based on Forbes' valuations for the 2001 season, a dozen teams will violate the 40% rule. This list includes Selig's own Brewers, as well as the Yankees. The Yankees make the list because while the Selig Plan treats salaries for future seasons as "debt," it ignores the future revenues available to pay those salaries. Although the Yankees are virtually guaranteed revenues of $200 million/year in perpetuity, they can't commit this money in advance without running afoul of Czar Bud's ludicrous formula. If bankers followed Selignomics, the market for home mortgages would evaporate overnight.

What will happen to these dozen clubs whose owners woke up one day to discover that they were in violation of Selig's brand new interpretation of a long-ignored rule? This MLB.com article nonchalantly explains:

"Sanctions against teams in violation of the 60-40 rule after the June deadline will include fines, withholding of national TV revenue and even the possibility, albeit extremely remote, of placement into trusteeship."

On what planet? In the unlikely event that the Players Association can't persuade an arbitrator to block this rule, wouldn't you like to be a fly on the wall when Selig tells George Steinbrenner, Tom Hicks or Peter Angelos that he's cutting off their TV money or threatening to place their club into receivership? ("But...but that's anatomically impossible, Peter!")

Even that reaction will be mild compared to the response of Mike Ilitch, Peter Magowan, and elected officials across America: Selig's formula counts stadium debt against the 40% limit. Ilitch of the Tigers and Magowan of the Giants, who borrowed nine-figure sums to build their new parks, can't possibly comply with the rule.

That lesson won't be lost in other cities, where owners demanding new stadia will soon be explaining that while they'd love to help pay for their facilities, Commissioner Selig won't let them. Coming in the wake of the Minnesota Twins' argument that holding them to the terms of the Metrodome lease they renewed six weeks before the contraction announcement "derides the free market system, blasts the fundamental policies of free enterprise and private ownership, and assures this court that government knows best," it's apparent that MLB really does consider itself above the law: the only business entitled to millions of dollars in public subsidies with no obligation in return.

Since the last out of the 2001 World Series, Major League Baseball has sustained a non-stop series of self-inflicted wounds. Commissioner Selig has antagonized the entire state of Minnesota, insulted the intelligence of a roomful of Congressmen, rigged the sale of the Boston Red Sox, and brazenly ignored decades-old rules against cross-ownership and conflicts of interest. But those abuses benefited his employers, the owners. Last week he may finally have gone too far.

If the owners allow Selig's interpretation of the 40% debt limit to stand, as of June he will have the unfettered power to ruin half the franchises in Major League Baseball--franchises that until last week had no reason to suspect they were doing anything wrong. If they allow $100 million of revenue sharing money to be diverted into Selig's slush fund, the owners may as well sign over operating control of all 30 clubs to the man whose idea of marketing is to whine how "most of our clubs have no chance to win," and who ran his own club into near-bankruptcy.

Bud Selig is a cancer on Major League Baseball. So long as he remains commissioner, MLB will grow sicker and sicker.

Doug Pappas is an author of Baseball Prospectus. You can contact him by clicking here.

Related Content:  Bud Selig,  Revenue Sharing,  Revenue,  The Who,  Peter Magowan

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