VideoUnder- and Overachievers
Baseball's implied debt ratings lend some credence to the league's claims that debt is eating a larger chunk of earnings. But at the same time that teams are struggling with debt, baseball's most-notable effort to level the economic playing field—through revenue-sharing—has led some to charge that wealthy teams underreport their earnings to MLB.
Under the current revenue-sharing system, all teams place 34 percent of net local revenues into a putative pool, which is then divided among the teams. Some, like the Yankees, are net contributors, while others, like the Marlins, are net recipients. Last year's World Series winners "absolutely could not have won had they not received tens of millions of dollars in revenue sharing," says Mariner. "The Anaheim Angels could not have won [in 2002] without being a significant revenue-sharing recipient."
Andrew Zimbalist, an economist at Smith College, disagrees. In his recent book, May the Best Team Win, he argues that revenue-sharing rules have not reversed growing payroll disparities, because poor teams aren't required to spend the money on payroll. But, he says, the rules do give the richest teams the incentive to hide revenue by shifting it to affiliated companies. Indeed, he argues that team-level book or operating losses are irrelevant. "The proper question to ask is, 'Does making an investment in a Major League Baseball team pay off or not?'" he says. "It pays off in lots of ways." In other words, he suggests that the financial reporting of team CFOs is rendered irrelevant by the owners' ability to manage their larger investment portfolios.
Such accusations infuriate Mariner, who calls Zimbalist a "hack economist who's never had a job in sports." (Zimbalist's book is particularly critical of the Marlins' transfer-pricing practices in 1997, when Mariner was team CFO.) Mariner points out that under the current CBA rules, PricewaterhouseCoopers performs a separate revenue-sharing audit on every team based on "aggressive" rules defined by a committee of owners and Mariner's staff, and reviewed by the players' association. "We want to capture all baseball- related revenue," he insists, "and we will find no revenue we don't like." Moreover, he says, the notion that teams would knowingly operate "in a system where everyone else is cheating is just absurd."
But at least one finance executive echoes Zimbalist. "Ask baseball CFOs about related-party transactions and see if they don't turn pale," suggests Ray Schaetzle, former executive vice president of finance of the New Jersey Nets, which merged with the Yankees to form the YankeesNets organization. Schaetzle (now a consultant with Resources Connection Inc.) won't discuss specific details about YankeesNets, but Zimbalist's book claims that the organization helped the Yankees shield some $60 million from revenue-sharing requirements in 2002.
"When you have related-party transactions, you have a lot of opportunity to reduce costs through economies of scale—or to hide things and make the franchises look less profitable than they are," explains Schaetzle. But since the rules that PwC audits are defined by MLB itself, baseball outsiders are largely reduced to speculating about the fair-market value of broadcast rights and other contracts.
For example, when News Corp. sold the Los Angeles Dodgers to Boston real-estate mogul Frank McCourt, the team's contract for local broadcast rights was boosted from $23 million to $36 million. To Zimbalist, that $13 million difference is evidence that Fox had been underpaying its sister company. But the Dodgers' Hurley insists "there is no chance for even slightly manipulating the numbers." In fact, says Hurley—one of the few CFOs in baseball who has also been subject to Sarbanes-Oxley rules—"the criticism that everybody can report what they want and they are all making a ton of money really isn't true. The unfortunate part is that the level of losses we are showing is embarrassing."
Deep in the Hole
As CFO went to press, baseball was more embarrassed by the growing steroid scandal than by its financial state. But the sport's finances have always been inextricably linked to its labor problems, which have far more potential to damage the game. The 1994 strike that canceled the World Series was a financial disaster for owners and players alike and devastated attendance in subsequent years.
Unless baseball's finances show at least some unilateral improvement under the current CBA, owners and players are likely to find themselves at loggerheads again in a few years. Baseball CFOs have a chance to drive that improvement by controlling debt limits, expanding revenue streams, and rationalizing salaries. But that would fail to account for the unique x-factors in baseball—especially the fact that for many owners "the bottom line is not the end game," notes Fitch's Champeau.
In fact, odd as it sounds, investors in professional sports are far less—if at all—concerned about financial payback than corporate investors. "There are psychic benefits," explains Marvin Goldklang, a limited partner in the Yankees. For Goldklang, who says he hasn't looked at a Yankees financial statement in years, the benefits include celebrating a World Series win by riding up Broadway in a ticker-tape parade. "That's a once-in-a-lifetime experience," he says. "Although in the case of the Yankees, it's been several times."
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