Pittsburgh Pirate finances and Gladwell’s Law

Malcolm Gladwell’s Law – Journalists need to have a better grasp of financial figures in order to truly understand some of their subjects.

A good place to analyze how a better understanding of finances could impact a journalist’s work is an article by Rob Biertempfel of the Pittsburgh Tribune-Review back in April 2008. As someone who was been scouring the web for clues about MLB finances for the past two years, I can tell you that this article represented a real opening in the secretive world of MLB finances. I wrote this post shortly afterwards. Mr. Biertempfel got the Pittsburgh Pirates President Frank Coonnelly to disclose the following items which few teams ever publicly admit or even discuss:

  • Amount expected to be received in Revenue Sharing for 2008 – $35 million.
  • Team had debts which exceeded $100 million and the interest payments were between $5 and $7 million yearly.
  • That the CBA language as to the use of revenue sharing monies — “to be used to improve on field performance” — would not preclude the Pirates from using those monies to pay down team debt.
  • Although Coonnelly states that the “Forbes numbers are never right,” Coonnelly does not take issue with Forbes estimate of the Pirates operating profits for 2006 [$25 million], given that he agrees that it was the “highest [operating] profit recent season” for the Pirates and that he “didn’t expect to be seeing $25 million in operating profits [in the future].”

How a financial background could have affected the questions or focus of this article.

  1. Coonelly states: “Team is paying down debt and reinvesting in the club, not spinning off money to ownership.” It matters greatly the source of the debt being paid down. If the debt being paid down was incurred as part of the purchase of the franchise, then paying down debt is an indirect way of enriching ownership.
  2. What does Mr. Coonnelly mean by ‘spinning off?’ Selling off interest in the franchise or the owners salary? What is the owners salary? Is it tied to performance [a little sarcastic in the case of the Pirates, but still a legitimate question]?
  3. Coonelly states: “When interest, taxes, depreciation and amortization are thrown into the mix, said the Pirates rank 27th in revenue.” Those non-operating expense items [interest, depreciation and amortization] would affect net income, but not revenues or even the operating profits. Forbes does not disclose net income.
  4. Given that Forbes employs the same methodology yearly, how likely is it for Forbes to have materially erred on determining operating profits in 2007, given that 2006 was accurate?
  5. The article glossed over the fact that the team purchased for $92 million in 1996 was now estimated to be worth $292 in 2008. The fact that their investment in the team had tripled in value — largely due to the fact that a new stadium was built for them with a minimal investment by the franchise [net of $14 million] — means that the team literally has been handed house [or PNC] money to play with.
  6. How reliable are Forbes estimates? The less complicated the finances of a franchise, the more accurate Forbes can be. Franchises who don’t own their RSN’s [like the Pirates and Marlins] are easier to calculate. Forbes estimate of the Marlins worth was 97% accurate when compared to the value ascribed to the franchise in the Marlins stadium agreement deal with local governments in early 2009.

OK, this is the fun part. $100 million in debt? From where?

Keep the following in mind:

  • Team purchased in 1996 for $92 million.
  • Team assumed debt from the URA totaling $29 million initially and an additional debt of $11.5 million in 2000. However, that is a debt which does not have to be repaid unless the team moves. The URA writes off roughly $2 million of that debt yearly.
  • Technically, the Pirates still have to disclose that debt on financial statements until it is actually written off, however it is clearly misleading to include that amount when disclosing debt, while ignoring the fact that the debt does not have to be repaid.
  • $100 million in debt and interest payments between $5 and $7 million would indicate that the team pays between 5 & 7% in interest rates, which is reasonable.
  • But if they are including the URA debt in the $100 million figure, then the reported $5 to $7 million in interest payments makes no sense, since the URA debt does not require interest payments. The interest is added to the principal and will be written off as well.
  • The Pirates operating profits since 1998 total $98 million. Only one year in that period showed an operating loss.
  • The Pirates net contribution towards the stadium was a net of $14 million, since naming rights were used to offset scheduled team contributions.

Bottom Line: The Pittsburgh Pirates use of revenue sharing monies to pay down team debt is very likely an indirect method of enriching ownership, when a part [or a majority] of the $100 million in debt could only have originated from the team’s purchase.

Pretend that a generous neighbor on your block gave you $10,000 yearly to “improve the look” of your home. Imagine further that you turned around and paid down the principal on your mortgage instead of fixing up your property. Could you convince that neighbor that his monies didn’t go into your pocket? If you could, you are ready to be a MLB executive.

Click on the spreadsheet to enlarge or print

The Biertempfel article referenced is copied in full at end of post.

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Profitable Pirates to pay down huge debt
By Rob Biertempfel
TRIBUNE-REVIEW
Friday, April 18, 2008

The Pittsburgh Pirates turned a profit in 2007 — the franchise’s fourth consecutive year in the black — and will do so again this year, regardless of how many games they win or lose.

Team President Frank Coonelly said the profit will be used to pay down the franchise’s debt, which will help field a better team in the future. The Pirates have endured 15 consecutive losing seasons.

According to Forbes Magazine’s annual team valuations, the Pirates’ 2007 operating income was $17.6 million. That ranks 18th among the 30 major league clubs. Forbes estimated the team’s value at $292 million, putting it at No. 28 among the 30 major league clubs.

“Their numbers are never right,” Coonelly said Thursday. “But, we are profitable.”

Coonelly said the Pirates’ actual profit is much lower, taking into account annual interest payments of “over $5 million, maybe approaching $7 million” on the franchise’s $100 million-plus in debts.

When interest, taxes, depreciation and amortization are thrown into the mix, Coonelly said the Pirates rank 27th in revenue.

The Pirates expect to receive about $35 million this year through Major League Baseball’s revenue-sharing system, Coonelly said, adding that it’s incorrect to believe that money must be used only to increase player payroll.

“The revenue-sharing plan says you have to use those proceeds to improve your performance on the field,” Coonelly said. “That’s written extraordinarily broadly, and we did that on purpose. Paying down debt can help you improve on the field. You can’t get any better while you’re taking a (huge) interest hit on all the debt you have. You can’t be building an academy in the Dominican Republic. You can’t be improving Pirate City. You can’t be spending on major league payroll.”

This year, the Pirates broke ground on a $5 million baseball academy in the Dominican. The club contributed $2 million of the $30 million necessary to renovate its spring training complex in Bradenton, Fla.

Coonelly denied that principal owner Bob Nutting is pocketing the Pirates’ profits.

“We’re paying down debt and reinvesting in the club, not spinning off money to ownership,” Coonelly said. “If the Nutting family wanted to get into a business that would just spin off money, baseball would not be that business.”

The sport is not necessarily a loser for owners, though. According to Forbes, Major League Baseball’s profits increased 7.7 percent last year to $5.5 billion. The magazine estimates the average team is worth $472 million, a one-year hike of 9.5 percent.

The Forbes estimate means former owner Kevin McClatchy’s purchase price of $92 million in 1996 was $200 million below its current value.

Where is all that money going? Not necessarily to the players. According to Forbes, player costs in Major League Baseball (salaries, bonuses and benefits) have fallen over the past five years from 66 percent of revenue to 56 percent.

In 2003, 16 teams lost money. Last year, only Toronto, Boston and the New York Yankees posted operating losses. But, Boston and New York recouped their losses with the dividends from their cable television deals.

Last year, Forbes reported the Pirates made $25.3 million profit in 2006, the year PNC Park hosted the All-Star Game.

“It was the highest-profit season in the recent past for the Pirates,” Coonelly said. “I don’t expect us to be seeing $25 million operating profits. I expect (growth), although I don’t want to promise it.”

Rob Biertempfel can be reached at rbiertempfel@tribweb.com
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The arrogance of Marlins ownership

This morning I was in my car early heading to work at 6am. I was looking forward to at some point today blogging about what a great season the Marlins had. I was very surprised to hear from Joe Rose, on the air at WQAM, that Marlins ownership, New Yorkers Jeffrey Loria and his former son-in-law, David Samson, were preparing to fire manager Fredi Gonzalez. Going online I learned from Juan Rodriguez’s Marlins blog that they already have his replacement, Bobby Valentine, having leaked their interest to ESPN and SI over the weekend.

Loria is of course free to hire whomever he prefers. What Marlins ownership can’t do is tell us that Gonzalez will be fired because the team under-performed, because that claim is absurd on its face. So far, Larry Beinfest does not appear to be joining in with the company line, given that when he was asked by Rodriguez why the team had missed the playoffs, he responded that ‘the main reason was the inconsistency from the starting pitching.’ That will ring as true to anyone who has followed the Marlins — three-fifths of the Marlins’ season-opening rotation spent time in the minors because of non-performance — as the ‘under-performing’ smear rings false.

The reason Gonzalez will be fired is that Loria prefers Valentine [or whomever] to Gonzalez. Again, it’s his prerogative. The reason this firing will intensify the dislike of Loria and Samson is the lack of integrity with which they seem to operate. Saying that Gonzalez is being replaced because the Marlins didn’t make the playoffs is too obvious a lie.

But this is not just another managerial firing, i.e. this is not Jeff Torborg or Joe Girardi. The Marlins are in the processing of relocating their franchise from the Dade-Broward County line to Little Havana. Gonzalez is Hispanic, with a Cuban-American background. Miami-Dade County in general, Miami specifically and Little Havana microscopically, in case some New Yorkers may not have noticed, has a ton of Hispanics [not as many as New York, but a lot]. Those facts don’t mean that Gonzalez can’t be fired. They do mean that Gonzalez can’t be fired for a stated reason which is a lie, without building resentment against the franchise.

By telling such overt and dismissive lies, Loria and Samson are in effect spitting into the face of the community they are supposed to become a part of. A community which recently agreed to partner up with MLB and the Marlins to build a stadium. Gee, it’s almost as if they don’t care about their customers?

Noted.

Which brings me to the following article by Thomas Boswell, a respected sportswriter with the Washington Post. Boswell’s article is about the Washington Nationals finances and a key source is the Forbes Magazine reporting about MLB finances.

Below is the financial statement I have developed about the finances of the Florida Marlins. The numbers are based on, and exactly tied into, the Forbes reporting, with specific line items confirmed independently. The Florida Marlins operating profits for 2006 through 2008 were $43 million, $36 million and $44 million. For 2009, their operating profit will likely be in the mid-$30’s.

I have blogged extensively about the Marlins finances here on this blog. If you were outraged at the phony reasons Marlins ownership has given to explain why they wish to fire Gonzalez, now you know how I’ve felt listening to them deny their profitability.

Click on the image to print or enlarge

Thomas Boswell’s article referenced are copied in full at end of post.

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A D.C. Game of Moneyball

By Thomas Boswell
Thursday, October 1, 2009

The Nats’ final home game of the year Wednesday combined all the paradoxical and troubling threads of a season in which the team had the game’s worst record and saw attendance drop 22 percent. Yet these same Nats, who will certainly receive revenue-sharing funds from other clubs this winter, operate on such a low budget and possess such a healthy bottom line that they are the financial envy of most other franchises.

The combination of Nats potential, both as a team and a market, has stood in contrast all year to the team’s deluge of 103 losses. All that was illustrated, to an almost ludicrously degree, by a Justin Maxwell walk-off grand slam to sweep the Mets before 23,944. That two-out, full-count blast in the ninth off New York reliever Francisco Rodriguez brought cheers but also a hard question. Why are such moments, which make addiction to baseball go viral in any town, so rare here?

As Washington’s obvious promise has been thwarted by its gruesome won-lost reality, resentment toward the way the Nats do business, already prevalent in Washington, is now spreading through the game. This offseason may be the juncture at which both local fans, as well as executives throughout the game, decide if the Lerners are responsible baseball citizens.

The Nats, who clinched the game’s worst record on Wednesday thanks to a Pirates win, are on the verge of becoming a lightning rod of criticism, especially by big-market teams that pay into the game’s huge revenue-sharing pot, according to numerous baseball sources contacted over the last three months.

“You’re probably going to see revenue-sharing reform pretty soon,” an American League executive said. “It’s usually small-market teams like Pittsburgh that are the issue.”

The Pirates, who have fielded 17 straight losing teams yet concede they have made a profit in each of the past six seasons, exemplify the business model: keep the payroll tiny, lose a ton of games every year, yet turn a profit thanks to revenue sharing and then claim it’s the only way to survive in a tiny market.

But the Bucs have an excuse: Their metropolitan market — like Denver, Baltimore, Cincinnati, Cleveland, Kansas City and Milwaukee — is less than half Washington’s size (No. 9 in the United States).

If the Nats keep operating as they have, they’ll be seen as the only top-10 market with the gall to act like a bottom-five town.

When Major League Baseball ran the Nats, the Lerners inherited a 2006 payroll of $63 million that many considered skimpy after the Nats averaged 33,000 fans in ’05. Yet the Lerners cut that budget immediately to $37 million and have not returned to $63 million. One consequence is that Forbes magazine ranked the Nationals the second-most profitable team in baseball in ’08.

Even with the recent contracts to Adam Dunn, Ryan Zimmerman and Stephen Strasburg, the Nats’ payroll will still plummet from $61 million this year to $40 million in current ’10 obligations, close to dead last in baseball.

The Nats’ position: We won’t tell you anything about our finances, but just wait ’til next year.

“We are tremendously excited. The next big step is right there to be taken,” said President Stan Kasten, who speaks for the team. “This is not a great year if you want a [free agent like CC] Sabathia or Mark Teixeira. But the players who are available are just what we need: a veteran starter in the rotation, two more arms in the bullpen and a middle infielder who helps our defense.

“We can do those things. We just have to do those things.”

Actually, the Nats could afford to do all this and more. The bullpen arms they talk about don’t include a costly closer. Add an $8-million-a-year right fielder if you want, too. (They won’t.)

The paradox of the Nats was apparent in their final homestand. In nine games, at which you might expect empty stands, the Nats averaged 22,990 fans vs. their average of 22,719. Same old story: Some of us were the incorrigible core; some came to see a popular foe (Dodgers); and 85,174 arrived last weekend just because the weather was nice and, well, it was the last baseball this year.

Baseball awarded the Lerners such a popular core American product, still relatively affordable, and the District built them such a pretty new ballpark, that they can’t keep people away. Attendance ranked above six teams, and if the average had been just 1,000 higher (as it might be once Strasburg arrives), the Nats would have been ahead of 10 teams. Factor in the Nats’ big-market ticket prices, and they stand right in the middle of baseball in gate receipts.

To see how well the Nats are doing, even though the Lerners’ public position is that they will “take no money out of the team” in the first 10 years, compare them to the Pirates: Since the Lerners took over, the Nats have outdrawn the Pirates by 1.4 million fans and, at higher ticket prices, produced about $100 million more in gate revenues. The Nats’ local TV revenue (about $24 million a year) is also far higher.

On the other hand, the Lerners paid far more for the Nats, and borrowed more money, a debt that must be serviced.

The Nats provide no information on how they define “taking no money out of the team,” except Ted Lerner’s comments to me twice that he considers debt service as a cost. Kasten adds that Forbes magazine’s ’08 ranking of the Nats as the second-most profitable team in baseball is “way off.” How so? No detail. Sorry.

Such privacy is their corporate right, but it’s hardly forthcoming from a family that presented itself as a long-term partner with the District in the civic-minded attempt to revive Southeast with baseball as an expensive core catalyst.

Kasten assures me I can’t possibly grasp the Nats’ high finance. He even threw up his hands in exasperation, a new touch.

“That shows how much you don’t know,” Kasten said.

Here’s one theory: After speaking with executives of other teams about their borrowing structures, one approach is to secure highly leveraged term loans with revolving lines of credit and then to amortize principal in the manner of a mortgage; that way, owners can claim to take little or no money out of the teams while still building their equity (and thus their own net worth).

Unlike the tiny-town teams, the Nats are a franchise with a defining choice to make. But it won’t be psychologically easy. Teams such as the Padres have argued that, unless you are one of the sport’s traditional “haves,” it’s not a winning business proposition to add tens of millions to payroll to build a better team. Ironically, the way the game is structured, it’s safer and easier to be a lousy cheap club, but be ensured a decent buck.

Kasten vows that the Nats still have the same big-market dreams they proclaimed three years ago when the Lerners brought a team back to their home town, claiming they would build a franchise worthy of “the most important city in the world.” The Dunn, Zimmerman and Strasburg deals are merely first tastes. Just wait — but not long. That’s their pitch.

No Washington team has lost more than 106 games since 1909 — 100 years ago. The Nats could still reach 107 this weekend.

If the Lerners keep their promises, that is an opportunity that should never, ever come again. ———————————————————————

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