Reds Abuse MLB Revenue Sharing

[mth123]

NM

[backbencher]

They ought to take away a dollar of revenue sharing for every dollar the team is below the major league average.

Other than in Lake Wobegon, I don't think that this is how averages work . . . .

The Reds can and should have a top-10 at least once every 10 years, but instead it's been 25+ years since they had a top-10 payroll. Reds greedy owners are just pocketing $$$$ meant to be spent on players, and I would bet the Reds are considerably more profitable and take in considerably more revenue than they are made out to be.

Under the current structure, it is almost impossible for the Reds to carry a top-10 payroll, absent perhaps a one-year massive balloon payment to a player or two. Three reasons. One, there are more than ten markets that are not just bigger than Cincinnati, but massively so. They would have to all underspend for it even to be possible. Two, most large contracts are multi-year. Even if the Reds could pull off a big number in one year, they could not support it for several years running. Three, MLB has debt service limits for teams. The Padres, a team in a bigger market with a wealthier ownership group, are currently afoul of the debt service rules and (according to this week's reports) will have to unload 20% of their player salary this offseason to get back in compliance. Now, their 2023 salary was top five, not "just" top ten, but the point is that the accounting just won't work for smaller teams to spend like they are in New York or LA.

[mth123]

Correct.

National media revenue, other MLB-level revenue: Split 30 ways.

Local revenue: Teams keep 52% of their own revenues, full stop.

Revenue sharing: Every team kicks in 48% of its local revenue, which then gets split 30 ways. However the structure is more complicated, with teams either "qualified" or "disqualified" based on market size. Clubs that are disqualified from revenue sharing get refunds from the undistributed revenue sharing pool based on their contributions to it. These are the amounts that must be spent to improve the on-field product. Revenue sharing is largely unrelated to the luxury tax.

Competitive balance ("luxury tax"): Teams spending on core salary over various thresholds kick in penalty amounts to a competitive balance pool. At high and recurring levels they also may be disqualified from revenue sharing. The competitive balance pool is used for various Commissioner's projects but also can be allocated to qualified revenue sharing clubs - but only if those qualified clubs are increasing their local revenues year over year.

The big three sources of revenue are national media, local, and revenue sharing. Competitive balance funds are quite limited in comparison.

As I understand it, Local revenue includes Ticket Sales, so the misnomers here are:

1. The Reds receive $115 Million subsidy, when in fact the number is $115 Million less what they contributed to the pot which is likely a much smaller subsidy number
2. "before they sell a single ticket" Ticket sales are included in the numbers above. So as Ticket Sales go up, the Reds keep 52% of it and the rest is included in the Revenue sharing pool.


This is why I assume next year's payroll will be this year's number plus a nominal increase. I'm guessing around $90 Million.

[backbencher]

As I understand it, Local revenue includes Ticket Sales, so the misnomers here are:

1. The Reds receive $115 Million subsidy, when in fact the number is $115 Million less what they contributed to the pot which is likely a much smaller subsidy number
2. "before they sell a single ticket" Ticket sales are included in the numbers above. So as Ticket Sales go up, the Reds keep 52% of it and the rest is included in the Revenue sharing pool.

Agree.

The team of course has every incentive to boost local receipts - it not only gets to keep 52%, but it also gets back 1/30 of the remaining 48% and - with increasing revenue - becomes eligible for a competitive balance payment.

But it's not a 1:1 ratio. At the same time, overall trendlines for MLB would help Cincinnati, even if Cincinnati were below the overall trend (which in 2023 they are not).

[RiverfrontRed]

Fines and penalties including not receiving revenue sharing anymore

So is that what is happening? Are they being fined?

[LeatherPants]

So is that what is happening? Are they being fined?

That's what is to be determined. It's still going through the process.

[backbencher]

The farm and 6 years of control is the great equalizer of mlb. All the good small and medium markets get this

Well said.

[757690]

Yawn

The Reds have been 16th, 18th, 22nd and 23rd out of 30 teams the last four seasons. Far higher than their market dictates.

Payroll is not the Reds issue. Spending money wisely has been the biggest issue over the last two decades.

Time to dig out my payroll posts that showed the Reds pretty much middle of the pack over the last ~25 years.

First, I agree generally that the Reds main problem is how they spend their money on payroll, not that they don't spend money on payroll. Actually, it's that they never stick to a plan, which is why I hope they stick to the current plan.

That said, the issue of this thread is whether the Reds are abusing the MLB revenue sharing system. The facts are clear on this. They absolutely are. Where they rank isn't that relevant to this issue, since we know that many other teams are guilty of this as well.

The Reds get around $110M in revenue sharing each season. When you add in how much they make in ticket sales and everything else, they should have at least a payroll of $150M each season. That assumes around $50M in other expenses to run the organization.

So, in a few seasons, the Reds have spent what they should in terms of revenue sharing, but most years, including this year, they have not.

[backbencher]

The Reds get around $110M in revenue sharing each season. When you add in how much they make in ticket sales and everything else, they should have at least a payroll of $150M each season. That assumes around $50M in other expenses to run the organization.

The accounting here is very, very, very wrong.

To start with, you are way undercounting the revenue. The Reds revenues are likely well above $250 million (I've seen estimates of 2022 revenues as $266 million). National TV is around $60 million per team, then you add local revenues (Reds keep 52%), then you add the revenue share of $110 million. If you prefer, call it $170 million plus 52% of whatever the Reds local revenues are.

Then you are undercounting payroll expense. Player salaries are the largest part of player expense, but you need to add benefits, medical, pensions, post-season shares (which are funded by all 30 teams), player incentives (the new super 2 incentives are league wide), etc. I'm not going to look for the numbers, but it's probably $25 million per team or higher (and generally the same for each team, regardless of the size of the market). Then the player salary numbers you are counting are generally the 26/28-man numbers, while the Reds are paying for the 40 man (plus IRs). And then you have to add the costs of the minors on top of that. Bottom line, player expense is much higher than the number that we use as the shorthand for payroll.

Then you are grossly misunderstanding the costs of operations. In other Big 4 sports, the players take between 44 and 50 percent of the revenue (including pensions, etc.), leaving 50-56 percent for non-player expenses, debt service and profit. I never have done the research, but I would expect that baseball has a much higher cost structure than other sports - there are more games, meaning more travel between games and, when home, more utilities, more employees, more wages. There also is a pretty unique minor league development structure, meaning more scouts, more coaches. I don't know how much difference it all makes, but it has to be some. Debt service can vary wildly depending on how a team was acquired, how it supports payroll, and most of all stadium costs. In all, I'd be surprised if baseball could put 50% of revenue to player comp, I would expect something closer to 42 or 44 percent. Certainly "$50 million" in non-payroll operating costs is not even within shouting distance. How much do you think it costs to put on a single game - parkers, ticket takers, ushers, vendors, grounds crew, broadcast crew, suite personnel, utilities, food cost, security, coaches, training staff, etc.?

Also keep in mind that most operating costs, other than payroll, are likely to be pretty consistent organization to organization. The big markets can pay their concessionaires the same, more or less, and put all of their advantage directly onto the field.

Go ahead and make arguments that the Reds should spend more. That's part of the game. Complain about greedy owners. Same. I'm just trying to put you in the right framework for the numbers you throw out.


Editing to add:

If you want to play with some numbers, let's assume 280 million revenues, 46% of revenues going to player costs, and $25 million for benefits, minors, etc. That would yield a payroll of:

$280MM x .46 - $25MM = $103.8MM.

All of those numbers are assumptions, of course. I would expect the revenue to be about right, the percentage of revenue going to player costs to be lower (42% or so), and the benefits and other labor costs to be just a touch higher, but still under $30 million.

[Bob Sheed]

[RedTeamGo!]

That dude looks like such a doofus

[757690]

The accounting here is very, very, very wrong.

To start with, you are way undercounting the revenue. The Reds revenues are likely well above $250 million (I've seen estimates of 2022 revenues as $266 million). National TV is around $60 million per team, then you add local revenues (Reds keep 52%), then you add the revenue share of $110 million. If you prefer, call it $170 million plus 52% of whatever the Reds local revenues are.

Then you are undercounting payroll expense. Player salaries are the largest part of player expense, but you need to add benefits, medical, pensions, post-season shares (which are funded by all 30 teams), player incentives (the new super 2 incentives are league wide), etc. I'm not going to look for the numbers, but it's probably $25 million per team or higher (and generally the same for each team, regardless of the size of the market). Then the player salary numbers you are counting are generally the 26/28-man numbers, while the Reds are paying for the 40 man (plus IRs). And then you have to add the costs of the minors on top of that. Bottom line, player expense is much higher than the number that we use as the shorthand for payroll.

Then you are grossly misunderstanding the costs of operations. In other Big 4 sports, the players take between 44 and 50 percent of the revenue (including pensions, etc.), leaving 50-56 percent for non-player expenses, debt service and profit. I never have done the research, but I would expect that baseball has a much higher cost structure than other sports - there are more games, meaning more travel between games and, when home, more utilities, more employees, more wages. There also is a pretty unique minor league development structure, meaning more scouts, more coaches. I don't know how much difference it all makes, but it has to be some. Debt service can vary wildly depending on how a team was acquired, how it supports payroll, and most of all stadium costs. In all, I'd be surprised if baseball could put 50% of revenue to player comp, I would expect something closer to 42 or 44 percent. Certainly "$50 million" in non-payroll operating costs is not even within shouting distance. How much do you think it costs to put on a single game - parkers, ticket takers, ushers, vendors, grounds crew, broadcast crew, suite personnel, utilities, food cost, security, coaches, training staff, etc.?

Also keep in mind that most operating costs, other than payroll, are likely to be pretty consistent organization to organization. The big markets can pay their concessionaires the same, more or less, and put all of their advantage directly onto the field.

Go ahead and make arguments that the Reds should spend more. That's part of the game. Complain about greedy owners. Same. I'm just trying to put you in the right framework for the numbers you throw out.


Editing to add:

If you want to play with some numbers, let's assume 280 million revenues, 46% of revenues going to player costs, and $25 million for benefits, minors, etc. That would yield a payroll of:

$280MM x .46 - $25MM = $103.8MM.

All of those numbers are assumptions, of course. I would expect the revenue to be about right, the percentage of revenue going to player costs to be lower (42% or so), and the benefits and other labor costs to be just a touch higher, but still under $30 million.

Thanks for the info. But I disagree with some of this.

First, you double counted $25M for expenses. That should be part of the 54% that assume goes to expenses. Benefits and minors all count as organizational expenses. I am not sure why you decided to make them separate and then add them again.

Until teams open their books, we are all just guessing. I have heard the number that sports teams spend on organizational costs be in the range of 25% to 50%. But let's use 50% for the sake of argument.

I would not count money from revenue sharing as revenue when calculating the organization's expenses. Let's be clear, it's not that the organization's are tied to the team's revenue, it's that it normally works out that way. In other words, operational costs are fixed. If the Reds draw 3 million fans, their operational costs will not rise by that same percentage. They will stay about the same as they were if the Reds drew 2 million fans.

The extra money the Reds get from revenue sharing is the same as money they got if they improved attendance. It's shouldn't increase the operational expenses. So let's do that math:

$170M ($280-$110) * 54% = $92M. That seems about right using your numbers, around $100M for all operational costs. That is around $1.25M a game.

$170M-$92M = $78M. Then add in the revenue sharing of $110M. $110 + $78M = $188M

So using your numbers, when we don't double dip, the range is between $128M and $188M. Basically what I said, $150M.

[Falls City Beer]

The Reds' biggest problems aren't payroll. Their biggest problems have been talent identification and a terrible farm structure. But pretending that short-sighted payroll retrenchment (like this past offseason) isn't penny wise pound foolish is hard to figure. Instead of seeing this offseason as an opportunity, they stubbornly decided to pull back. Why? For short-term reasons. To recoup what they feel they lost during the Covid seasons. It's just small-minded, conservative thinking. Imagine if they could have parlayed the attendance enthusiasm/bounceback this season into a strong post-season appearance instead of falling short. They do this crap all the time. They don't think about how to take advantage of changing dynamics. They respond. That's all.

[backbencher]

Thanks for the info. But I disagree with some of this.

First, you double counted $25M for expenses. That should be part of the 54% that assume goes to expenses. Benefits and minors all count as organizational expenses. I am not sure why you decided to make them separate and then add them again.

Until teams open their books, we are all just guessing. I have heard the number that sports teams spend on organizational costs be in the range of 25% to 50%. But let's use 50% for the sake of argument.

I would not count money from revenue sharing as revenue when calculating the organization's expenses. Let's be clear, it's not that the organization's are tied to the team's revenue, it's that it normally works out that way. In other words, operational costs are fixed. If the Reds draw 3 million fans, their operational costs will not rise by that same percentage. They will stay about the same as they were if the Reds drew 2 million fans.

The extra money the Reds get from revenue sharing is the same as money they got if they improved attendance. It's shouldn't increase the operational expenses. So let's do that math:

$170M ($280-$110) * 54% = $92M. That seems about right using your numbers, around $100M for all operational costs. That is around $1.25M a game.

$170M-$92M = $78M. Then add in the revenue sharing of $110M. $110 + $78M = $188M

So using your numbers, when we don't double dip, the range is between $128M and $188M. Basically what I said, $150M.

I don't understand your equations at all. If you explain them, I'll try to respond.

Revenue and expenses are separate. One does not add to the other.

I agree that incremental ticket sales increase revenue much faster than they increase expenses.

The $25MM is not double counted. Because I have not researched the Reds specific expenses, I was analogizing to the other Big 4 sports. The NFL, NBA and NHL all have agreements where the players get a percentage of league revenue. That players' share in each case includes benefits, pensions, incentives, etc. So when applying the NFL/NBA/NHL model to baseball, that is where it is appropriately considered, as part of the 44-50% of revenue that goes to players. The remaining 50-56% covers everything else.

If you want to argue that baseball has a lower expense structure than NFL/NBA/NHL, be my guest. I have not done any research on that, I'm just using reasoning based on 81 home games and a unique minor league system.

Speaking of which, it occurs to me that I did not explicitly add the teams' minor league draft pool to the player expense portion of expenses. For the Reds, that was nearly $14 million this year. So the $25 million I was ballparking for non-payroll player expenses are more like $38MM or $40MM. If I am right on the other numbers, that puts a hypothetical payroll, using my other assumptions, at $280MM x .46 - $40MM = $88.8MM.

[757690]

I don't understand your equations at all. If you explain them, I'll try to respond.

Revenue and expenses are separate. One does not add to the other.

I agree that incremental ticket sales increase revenue much faster than they increase expenses.

The $25MM is not double counted. Because I have not researched the Reds specific expenses, I was analogizing to the other Big 4 sports. The NFL, NBA and NHL all have agreements where the players get a percentage of league revenue. That players' share in each case includes benefits, pensions, incentives, etc. So when applying the NFL/NBA/NHL model to baseball, that is where it is appropriately considered, as part of the 44-50% of revenue that goes to players. The remaining 50-56% covers everything else.

If you want to argue that baseball has a lower expense structure than NFL/NBA/NHL, be my guest. I have not done any research on that, I'm just using reasoning based on 81 home games and a unique minor league system.

Speaking of which, it occurs to me that I did not explicitly add the teams' minor league draft pool to the player expense portion of expenses. For the Reds, that was nearly $14 million this year. So the $25 million I was ballparking for non-payroll player expenses are more like $38MM or $40MM. If I am right on the other numbers, that puts a hypothetical payroll, using my other assumptions, at $280MM x .46 - $40MM = $88.8MM.

I would not use the other sports salary cap calculations as a model for MLB for numerous reasons, but the clear one is that the remaining 50-56% doesn't represent their expenses, it is what the owners are comfortable keeping. We have no idea how much of that is profit, and I am sure that it varies from team to team.

What you are trying to argue is that the Reds take in $280M in revenue every year, and have expenses of $191M every year, outside of players salaries.

I am sorry, but that is laughable. Unless you want to consider around $100M in profit to be an "expense."

I am sticking with my figure of around $1.25M a game, or around $100M in expenses every year for the Reds, and most MLB teams. You clearly disagree, but until MLB teams open up their books, (and even then, we have to understand there will be some creative accounting) we will both just be guessing.