The Private Equity for Families Blog

Major League Baseball Will Cut 42 Minor League Teams

When the Houston Astros aren’t allegedly stealing signs, doing advanced analytics, or deploying infielders like short fielders in slow pitch softball, they are obviously sniffing the air of change in the wage and hour world. Recent articles from The New York Times, Sports Illustrated, ESPN and Fan Graphs all confirm Major League Baseball is reorganizing its farm system.

Right now the 30 major league teams average 6 different minor league teams. Big organizations like the Yankees have 9-10. The bottom two rungs on the ladder are the Short Season A clubs and the Rookie League.

It looks like 42 Minor League teams from the Short Season A and Rookie Leagues will be disbanded when the MLB revises its Professional Baseball Agreement with minor league owners, possibly as early as 2020.  If your favorite team is the Mahoning Valley Scrappers, the Orem Owlz, the Idaho Falls Chukars, the Batavia Muckdogs or the Lowell Spinners, you will most likely not have a minor league team next Thanksgiving.   If, however, you are a fan of Triple A clubs like The Durham Bulls, or the Portland Sea Dogs your romance with minor league baseball can continue.

When you try to make sense of this abrupt reorganization, you can’t justify it on the basis of avoided costs which MLB cites as a prime motivator.

MLB pays the salaries of the players and coaches in the minor leagues, and it directs all matters of player development and deployment. The rest of the teams’ expenses are paid for by the minor league owners.   Here is an explanation from Mark Stanton who has written an exhaustive law review article for Villanova’s Law Review on the topic of wage and hour discrimination in the minor leagues entitled “Juuuusst A Bit Outside”:

“A player is only entitled to receive his monthly salary during the championship season, which, at its longest, is five months. Thus, minor leaguers are not paid for any of the work they are required by contract to perform outside of their regular season and playoff games, such as spring training, winter workouts, and instructional leagues. Due to the limited number of months in which players can receive a paycheck, plaintiffs estimate the majority of minor league players earn less than $7,500 annually. Therefore, given their annual income, minor league baseball players fall well below the federal poverty guidelines.”

Can This Really Be About The Money?

If my math is correct and you assume 25 players on each of the 42 disbanded teams, the annual avoided payroll cost for 1050 players for 5 months of service is only $7.875 million. As a benchmark, Major League Baseball spent almost $5.5 million on baseballs alone and Max Scherzer of the Washington Nationals made $42 million in 2019. Can this really be a money problem for Major League Owners?

While the MLB announcement talks about reallocating resources for minor league facilities and raising the pay for the 160 surviving teams, Major League Baseball has a recognized attendance problem and a youth interest problem. It has spent millions on slick marketing campaigns to promote the game like RBI- Reviving Baseball in Inner Cities. Why self-inflict a promotional black eye and trigger very real contingent obligations to bricks and mortar owners in disbanded communities, possibly in the hundreds of millions, when you are only saving slightly more than the yearly cost of Rawlings hardballs?

MLB Owners May Have Much More At Risk

Whenever something does not make sense to me, I always say “FOLLOW THE MONEY”.   In this case the real money at risk is when the world learns the MLB pays these 42 teams, and the rest of the minor leaguers about $3.75 per hour for a full year of work.  This is the average contractual wage based on contract responsibilities, and it is currently being challenged as a violation of Fair Labor Standards Laws as below Federal minimum wage and overtime rules.  That lawsuit (Senne V. The Commisioner of Major League Baseball), has been pending since 2014 and has been tied up in dilatory appeals by The Office of the Commissioner of Baseball.

Recently, a judge in California ruled that past and present minor leaguers in 3 big states (California, Arizona and Florida) could sue MLB as a single class for wage discrimination. This is many thousands of players suing for a wage adjustment.  Furthermore, in a separate but important decision, the NLRB just ruled that Northwestern football players are “employees” opening the pay issue for college sports.

No Sympathy For Fat Cats

 Against a backdrop of strident voices calling for income equality across the nation, it is a major PR problem for MLB to be paying the best left-handed pitcher on the Vermont Lake Monsters and the best hitter on the Billings Mustangs only $3.75per hour.

The legal pundits, including Mark Stanton, think the MLB can win the wage discrimination legal battle in the Senne litigation under a “seasonal employment exemption” for players on teams like The Tri-City Devils and the Chattanooga Lookouts, but a victory may further erode their anti-trust exemption and tarnish their promotional campaigns.

Furthermore, billionaires are getting little sympathy and MLB owners know it.  Having the “Squad” target fat cat owners and then having Elizabeth Warren do the math online for minor league fans is not welcomed.

The alleged sign stealers from Houston are smart, and they sense correctly that a $12-$15 minimum wage for all will become a Maginot Line of liberal politics. Billionaire owners will not be able to hide from pitch fork wielding wage zealots. The only way they can afford the 160 teams they want to keep under their anti-trust exemption is cut the contingent wage liability for 42 teams on the margin.

Not surprisingly, MLB is volunteering to raise wages and working conditions for all the minor leaguers who stay.

While the Thanksgiving mood may be a little muted in secondary markets for affiliates of the Reds(4 teams lost) and Kansas City (3 teams lost) it is a pumpkin pie “so what” for perennial contender like the Yankees, Astros Dodgers, Red Sox, Giants and Indians who will only shutter one affiliate.

While I am thankful for my Indians I feel regret for communities losing their cornerstone of entertainment and association. The Owlz, Muckdogs and Lookouts will be missed.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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