Payroll and a Pandemic

I am not an economist. I know a lot more about GDP (Grounded into Double Play) than GDP (Gross Domestic Product). I’m not going to attempt to predict the actual dollar amount that MLB is losing in the current pandemic.

What I do know is that baseball is losing money. Lots of it.

Regardless of how many games MLB plays this season and in what format, revenue is going to be the lowest the sport has seen in decades. Nearly every scenario for play in 2020 includes no fans at all or limited fan access at some point later in the season. The loss of income from ticket sales alone can only be measured in the billions for the league.

MLB may be able to recoup some of this lost revenue through creative TV deals this season (if there is a season), but it’s hard to imagine these theoretical income streams providing anything more than a revenue-sharing band-aid to keep clubs solvent.

The question we are considering today is not how much money MLB and the Cardinals are going to lose but how will the lost income affect future payroll?

While modern MLB has never experienced a situation like the Coronavirus, we do have recent data from another severe economic downturn: the Great Recession of the late 2000s. Theoretically, we can look at payroll spending during that time period to build a representative model of how global economic decline affects baseball.

The following chart takes a sampling of teams – in this case, the National League – and charts their Opening Day payroll from 2007-2011. This sample range is designed to capture league spending habits pre-recession, during the recession, and at the beginning of the recovery.

J.P. Hill

Each vertical line represents the range of NL payrolls for each season. The box included with each line represents the median or middle NL payroll range by removing clubs with excessively high or low spending. This creates a payroll range for the average NL team. Comparing these median boxes provides a glimpse at average spending trends.

MLB payroll continued its upward trend from 2007 into 2008, when the full effect of the economic downturn was still undetermined. In ’09 and ’10, spending hit a hard wall. While some teams raised payroll, they were more than counterbalanced by mid- and small-markets selling. The net result was a dip in median payroll in 2009.

2010, as the economy began to show signs of recovery, brought slightly more optimism to baseball front offices. Spending increased slightly on average, but only carried the median back near 2008 totals.

By 2011, the economy was showing signs of bouncing back and that produced the largest dispersion of payrolls on our chart. Spending did increase slightly among small-market teams. Mid-market teams largely continued to hold steady. Larger markets and those with a more secure fanbase pumped money into rosters. Six franchises raised payroll above the levels of the median range of the previous three years.

The Cardinals were one of these teams. The trend presented above is evident in the path the Cardinals took toward payroll:

2007 - $90M
2008 – $99.6M
2009 – $88.5M
2010 – $94.20M
2011 — $109M

Talent-level and organizational goals – contending, rebuilding, firesales, etc. – play a role in interpreting the payroll data presented above and could be considered on a case-by-case basis. The collective picture, however, is clear (one that was obvious but we still needed data to corroborate): MLB payroll is affected by the national economy.

Well, duh!

We don’t yet know the full impact of the Coronavirus on the current economy. We know unemployment is way up. The Fed and Congress are trying to pump money into the economy at historic levels. I’m no economist but this doesn’t seem like a situation that will turn around immediately. It’s safe to say that economic forecasts for 2020-2022 look bleak.

My best guess is that the median range of MLB payrolls will drop even more in 2021 than they did in 2009. This will have a dramatic effect on free-agent spending, arbitration, and contract extensions. Unlike 2008-2010, the effect of the economic downturn will be felt universally as even the large market (like the Dodgers and Cubs) and mid-market teams with stable fanbases (the Cardinals) will have no buffer from the loss of ticket sales.

During the period presented above, the Cardinals maintained attendance levels over 3 million. It wasn’t until 2011 that attendance dropped significantly and temporarily. The Dodgers, like the Cardinals, maintained attendance well over 3 million until a one-season dip in 2011 (the team finished below .500 in ’10). The Cubs also showed steady attendance through the Great Recession era.

Despite economic decline, these clubs could still trust that fans would be in the stands. Yet, all three teams still cut payroll by at least $10M at some point between 2008-2011.

MLB and the Player’s Association did reach a compromise a few weeks ago that stated the players agree not to sue the league for unfulfilled salary payments in 2020 in exchange for a full year of service time gained, regardless of games played. This could mitigate some of the hit that MLB owners will have to absorb from lost attendance in 2020, but it does force the players to accept less-than-normal salaries for 2020.

It also puts some serious talent into the free-agent pool at a time when teams will likely be slashing payroll due to economic uncertainty. It seems doubtful that even clubs like the Dodgers and Cubs will be able to absorb a financial loss in 2020 and still retain or add to their current payroll levels in 2021 and immediately beyond.

Baseball could find itself with the best available talent it has seen in years but with very few clubs willing to take on salary.

The Dodgers, for example, have multiple high-priced free agents after 2020, including Mookie Betts, Justin Turner, Blake Treinen, and Joc Pederson. The Dodgers are only on the hook for only $120M in 2021 – almost $100 million below their current $218M payroll.

The Cubs have fewer scheduled free agents in 2021 but multiple players with options and high arbitration commitments. Kris Bryant is set for his fourth arbitration season. Anthony Rizzo has a $16.5M option for 2021. The club has just $85M committed for 2021.

The Dodgers and Cubs are in a position to drop up to $200M in payroll commitments if their financial situation demands it. How much will they add back?

The Cardinals, meanwhile, have $101M committed for 2021, and Molina, Wainwright, Brett Cecil, Wieters, and Brad Miller set to become free agents. Kolten Wong and Andrew Miller both have options for 2021. (Miller’s vests based on games played). John Gant is eligible for his second year of arbitration, and multiple players will enter arbitration for the first time.

What will Cardinals payroll look like in 2021? I do not believe there is any scenario where the Cardinals add payroll in 2021, even with elite talent potentially available at discounted rates. (Who wouldn’t want Mookie Betts at $25M per year instead of $35?)

My most optimistic scenario would have the club holding payroll level at $165M.

The most likely scenario is that the Cardinals will let their existing free agents walk after this season – yes, even Yadier Molina – and cut payroll by as much as $20M. That would be the largest drop in payroll on record for the Cardinals, but it would come in the most extreme circumstances.

They won’t be alone. 2020 has already been a terrible year for baseball. 2021 could be a terrible year for free agents.