MLB and the potential debt problem

[edabbs44]

Surprised this wasn't posted earlier. With all the talk about the Reds adding payroll, attendance, etc, this is the flip side of doing it the wrong way. Obviously we don't know much about how many teams, if any, are in trouble. However I am sure these teams would rather not be out of compliance with the debt rules.



The Los Angeles Dodgers and New York Mets are widely known to be in financial hot water.

But seven other major league teams, including the Philadelphia Phillies, Chicago Cubs and Texas Rangers, are out of compliance with MLB rules regarding debt, the Los Angeles Times has reported, citing three anonymous sources familiar with a confidential briefing presented at last month's owners meetings.


The Phillies have sold out Citizens Bank Park throughout the season. But a team's ability to fill seats does not correspond directly with its ability to turn a profit.

http://sports.espn.go.com/mlb/news/story?id=6621842

[bucksfan2]

The Phillies have sold out Citizens Bank Park throughout the season. But a team's ability to fill seats does not correspond directly with its ability to turn a profit.

I remember hearing their GM on the radio prior to the season starting. They were talking about Utley's injury and if the team could look elsewhere to fill the void. The GM said that he had absolutely no money to spend this season. He said that he was at his max budget prior to the season even starting.

[kaldaniels]

Why as a fan of the Reds do I feel like the guy who has been paying off his mortgage on time every month watching his in-debt-up-to-his-eyeballs neighbor getting bailed out.

The Phillies are not compliant with MLB's debt policy and still signed Cliff Lee? :thumbdown:

[cumberlandreds]

The Phillies being in too much debt is the scary one. They sell out every game and are seemingly big spenders in the free agent market. But they are in bad financial situation.
These are scary times for MLB and if some fiscal sanity isn't resolved soon some teams may go by the wayside.

[westofyou]

The Phillies being in too much debt is the scary one. They sell out every game and are seemingly big spenders in the free agent market. But they are in bad financial situation.
These are scary times for MLB and if some fiscal sanity isn't resolved soon some teams may go by the wayside.

http://www.philly.com/philly/blogs/phillies/Everything-you-need-to-know-about-what-you-dont-know-about-the-Phillies-debt.html




Essentially, the rule ties the amount of debt a team may carry to its average net income (revenue minus expenses) over the previous two fiscal years. The limit for most teams is 10 times their net income. The limit for teams who have opened stadiums in the previous 10 years, like the Phillies, is 15 times their net income.

So for every million dollars of net income the Phillies average, they can carry $15 million worth of debt. If their net income over the last two years averaged $10 million, they would be allowed to carry $150 million in debt. And so on.

[mbgrayson]

I view this as being good news for clubs like the Reds, who seem to have kept their financial house in order. When big spending clubs like LA, the Mets, and the Cubs have to cut back their spending, the Reds can't help but benefit. If the Yankees and the Red Sox finally make the list, real change may happen.

To me, this type of news will tend to act like a brake on huge salaries and long term deals that will be coming off the books for years. It won't stop these practices, but it will slow them down.

BTW, are we still paying Ken Griffey Jr. some of the deferred money that we agreed to give him years ago? How is that accounted for?

[edabbs44]

http://www.philly.com/philly/blogs/phillies/Everything-you-need-to-know-about-what-you-dont-know-about-the-Phillies-debt.html


Essentially, the rule ties the amount of debt a team may carry to its average net income (revenue minus expenses) over the previous two fiscal years. The limit for most teams is 10 times their net income. The limit for teams who have opened stadiums in the previous 10 years, like the Phillies, is 15 times their net income.

So for every million dollars of net income the Phillies average, they can carry $15 million worth of debt. If their net income over the last two years averaged $10 million, they would be allowed to carry $150 million in debt. And so on.


Two quick thoughts:

1) That calculation is ridiculous.

2) Maybe they need to look at Wall Street and see how overleveraging did for certain institutions.

[westofyou]

BTW, are we still paying Ken Griffey Jr. some of the deferred money that we agreed to give him years ago? How is that accounted for?

Player contracts are not considered debt under the CBA.

[15fan]

If an ownership group wants to run a sports franchise at a loss so as to maximize profitability and/or asset value of the rest of an investment portfolio, so be it.

And if running the value of a franchise into the ground by racking up debt puts the ownership group into a corner, fine. They sell to another investor when they can't cover their debt. Or they bring in additional outside investment. It's capitalism 101.

Free markets work. Let them.

[Brutus]

It should be noted there are technically two different debt calculations that Major League Baseball uses. There's the official one sanctioned within the CBA that WOY has posted, and there's also one using player contracts that is a 60/40 assets:liabilities ratio.

The 60/40 rule is more of a loosely-enforced rule, but is still on the books and a consideration. It basically asserts, as the name suggests, you can't carry more than 40% of your assets in the form of debt. Its' definition of debt, however, is a bit unlike what one would expect.

Assets are calculated, according to an ESPN article about 4-5 years ago, as simply two times gross revenue. Liabilities are all multi-year contracts, bank debt and stadium debt.

[reds1869]

I hope we don't go down the same path as English soccer. The vast majority of big time clubs are in debt up to their eyeballs and many are on the verge of being blinked out of any meaningful existence. Ownership groups use clubs to absorb their other business and personal debt during takeovers. Player salaries and transfer fees are astronomical but to "keep up with the Jones's" any club with serious aspirations of being competitive joins in. It is a really bad situation and I hope we don't see it in sports leagues here.

[edabbs44]

If an ownership group wants to run a sports franchise at a loss so as to maximize profitability and/or asset value of the rest of an investment portfolio, so be it.

And if running the value of a franchise into the ground by racking up debt puts the ownership group into a corner, fine. They sell to another investor when they can't cover their debt. Or they bring in additional outside investment. It's capitalism 101.

Free markets work. Let them.

The issue is that there can then be a trickle down effect on the other teams in the league if one or more teams make stupid financial decisions, therefore hurting the integrity of the league.

[bucksfan2]

If an ownership group wants to run a sports franchise at a loss so as to maximize profitability and/or asset value of the rest of an investment portfolio, so be it.

And if running the value of a franchise into the ground by racking up debt puts the ownership group into a corner, fine. They sell to another investor when they can't cover their debt. Or they bring in additional outside investment. It's capitalism 101.

Free markets work. Let them.

But they really aren't a free market. They operate a legal monopoly where each individual owner has a liability if one team fails to meet is obligations. When the Rangers went belly up last season it was the MLB owners who stepped in and gave them financing to continue the season. It was the MLB owners who originally stepped in and helped the Mets. It will be the MLB owners who step in and help the Dodgers when they finally go broke.

The problem I see is the price tag of franchises continue to increase. There will never be a shortage of people who want to own a franchise. The issue is the day to day operation costs continue to increase. It almost reminds me of the housing bubble, for years your home would increase so it didn't matter how much debt you took on, you could always sell your home and make a profit. As long as the market value of the franchise continues to increase on the open market MLB will be fine. But when that value stagnates or drops they house may be in serious trouble.

[kaldaniels]

If an ownership group wants to run a sports franchise at a loss so as to maximize profitability and/or asset value of the rest of an investment portfolio, so be it.

And if running the value of a franchise into the ground by racking up debt puts the ownership group into a corner, fine. They sell to another investor when they can't cover their debt. Or they bring in additional outside investment. It's capitalism 101.

Free markets work. Let them.

Doesn't the free market dictate that an organization like MLB can set rules for franchises?

[dfs]

hmmm...Yet there are tons of very smart people eager to buy a franchise.

accounting. Yum.

[15fan]

Doesn't the free market dictate that an organization like MLB can set rules for franchises?

Sure. But as rules are imposed, it moves from being a free market to a centrally planned market.

[15fan]

The issue is that there can then be a trickle down effect on the other teams in the league if one or more teams make stupid financial decisions, therefore hurting the integrity of the league.

That's where free markets are great. If someone repeatedly makes bad decisions, the market (in many forms) punishes them and will ultimately force them out of the game. If they make good decisions, the market rewards them.

[Sea Ray]

I'm surprised that there isn't more talk about this as it pertains to the CBA which expires at the endof the year. Why aren't they warning of Armageddon like they have been for the NFL and NBA? MLB's got a much more serious problem with a lot of their franchises than those leagues. I'd have to say the baseball owners would be foolish not to try to address these issues in the next CBA

[RedsManRick]

I'm surprised that there isn't more talk about this as it pertains to the CBA which expires at the endof the year. Why aren't they warning of Armageddon like they have been for the NFL and NBA? MLB's got a much more serious problem with a lot of their franchises than those leagues. I'd have to say the baseball owners would be foolish not to try to address these issues in the next CBA

Because unlike those two sports, MLB and the players both realize that a work stoppage would be disastrous.

The pain of '94 is still pretty fresh. It's precisely because the issue is so serious that you don't have the grandstanding.

Plus Bud is much more secretive than Stern or Goodell. He wont even admit there's a problem unless he thinks he has the solution.

[Sea Ray]

Because unlike those two sports, MLB and the players both realize that a work stoppage would be disastrous.

The pain of '94 is still pretty fresh. It's precisely because the issue is so serious that you don't have the grandstanding.

Plus Bud is much more secretive than Stern or Goodell. He wont even admit there's a problem unless he thinks he has the solution.

What's disasterous? What's going on in football or 7 MLB teams operating their ballclubs on a credit card paycheck to paycheck? I respect the NFL owners for being pro-active and addressing their issues before they become a huge problem. Baseball's building boom is over and getting folks to the ballpark is really going to be a challenge. They'd best address it. Status quo could lead to huge problems for MLB owners down the road