Where Does the Revenue Sharing Money Go?

This Milwaukee Journal Star article had some interesting statements from the owners of the Pittsburgh Pirates and the San Diego Padres. I posted here about some of the comments regarding offseason personnel moves and the soon-to-come labor negotiations here. One thing likely to be included in the negotiations will be revenue sharing since some owners don’t think there are enough revenues being shared. In any case, shared revenue does not always equate with higher payroll:

The Pirates received more than $13 million in revenue sharing and the Brewers nearly $20 million, but not all of that money went toward big-league payrolls. Some money was used to fund the farm systems and draft picks, and some went to retiring debt.

There’s a stipulation in the 2002-2006 CBA that says that shared revenue is supposed to go to improving the on-field performance of the big league team (page 106 under part (a) of “(5) Other Undertakings”). Any team that does not use its revenues received from sharing in this way has to answer to the commissioner. I’d be interested in knowing what proportion, on average, of the shared revenues went to things other than the big-league payroll.

Of course there are many ways to improve the big league team. A team could spend the shared revenue on current payroll or it could invest it in the farm system, and at least some (many? all?) teams are putting the shared revenue towards minor league investments. This suggests, at first blush, that an investment of a sum of money in the minor leagues provides a higher return than the investment of the same sum of money in the major league club.

Why? Off the cuff, one reason for this may be because minor league talent is cheaper, even though it is less-developed and riskier than major league talent. In addition, for players that make it to the majors, their salaries will often be below the value of their marginal contribution to their teams (because of the reserve system in place for young players). Free agents and arbitration-eligibles, on the other hand, have salaries much closer to the value of their marginal contribution to their teams, leaving relatively smaller return to capture.

One question: how does retiring debt improve on-field performance?

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Author: Phil Miller

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