cfo.com

Print this article | Return to Article | Return to CFO.com

Low and Away

When it comes to bookkeeping, Major League Baseball sure has a funny way of keeping score.
Stephen Taub, CFO.com | US
February 14, 2002

Epilogue:
It was a glorious season, a season of 73 home runs and 20 straight starts without a loss and 116 wins. It was the season of Ichiro and Barry and the Big Unit. For much of the 162-game schedule, it was the Seattle Mariners' season. And in the end, it was the season of a remarkable, nail-biter of a World Series.

Three weeks after the World Series, the glorious season officially turned ugly. That's when the powers that be at Major League Baseball (MLB) voted to eliminate two of the teams that play in the league. Those to be excommunicated before the 2002 season: the Minnesota Twins and the Montreal Expos.

Not surprisingly, MLB's designs to unilaterally ditch two teams set off a firestorm of controversy among baseball fans. So much heat, in fact, that league commissioner Bud Selig appeared before the House Judiciary committee on December 6 to explain why baseball desperately needed to change its setup.

At the contentious meeting, Selig presented a set of financial records. If accurate, the records would seem to suggest that any attempt to purchase a professional baseball team should automatically trigger a competency hearing.

According to Selig's math, 25 of the 30 major-league clubs lost money last year. From 1995 to 1999, claimed the commissioner, only three teams turned a profit: the Yankees, the Cleveland Indians, and the Colorado Rockies. All told, claimed Selig, major-league baseball clubs lost a staggering $1 billion in operations from 1995 to 1999.

Escalating player salaries, lamented the commissioner, are turning baseball into a money pit. "Owners struggle," Selig told the committee. "If they don't spend money, they're called 'El Cheapo.' If they spend more money, they have problems."

While many baseball watchers couldn't fathom why wealthy owners would risk a pillorying by claiming poverty, some believe there was a method to Selig's madness. At worst, they say, the commissioner stood to gain some sympathy among fans by pointing a guilty finger at multimillionaire ballplayers. At best, he might gain some converts among committee members contemplating ending MLB's prized antitrust exemption. Either way, some observers believe that Selig thought his testimony would commence a public forum on the economic hardships that come with owning a baseball club.

But a funny thing happened on the way to the forum. Soon after Selig's appearance before Congress, John Henry, the owner of the Florida Marlins, got into a bidding war to acquire the Boston Red Sox. Even after a $660 million offer from Henry's group was accepted, spurned suitors kept coming back with higher and higher bids. In Montreal, the distraught owner who seemed only too happy to get out of baseball ended up buying the Marlins from Henry. And in Minnesota, an unlikely white knight — an Alabama businessman — appeared on the scene, offering to purchase the allegedly money-losing team.

All of which raises Tim McCarver's question: What's going on here?

The Gory of Their Times
Indeed, as the new season begins, some economists say they're still having trouble deciphering Major League Baseball's accounting. "The numbers Selig provided don't have any relationship to the economic health of baseball," insists Andrew Zimbalist, an economist at Smith College.

At the very least, there appears to be a sizable disconnect between owners' claims of mounting losses and the endless stream of successful business types who want to buy major league clubs. Said Gov. Jessie Ventura (Ind-Minn.) in testimony before the House Judiciary committee, "These people did not get the wealth that they have by being stupid."

What's more, some critics argue that many of Major League Baseball's fiscal wounds are self-inflicted. The league's antitrust exemption, for example, enables owners to block failing franchises from moving to other cities. That exemption was granted by the Supreme Court in 1922 and has been subject to great debate ever since. Without the exemption, cash-strapped teams would be able to revive their fortunes by moving to other cities — cities that might offer attractive financial packages as incentives.

And while owners may decry mounting player salaries — the average team payroll jumped from $33 million in 1994 to $66 million last year — it's hard to deny that bidding wars aren't much without bidders. Admittedly, the current salary arbitration system for players still under contract — in which an arbitrator must choose between a player's suggested salary and an owner's suggestion — is driving up salaries, particularly for non-superstar types.

But owners agreed to the setup back in the '70s. And nobody's forcing a team's GM to fork over $10 million a year for a middle-inning setup man who specializes in getting out guys named Irving.

Last year the Red Sox spent $118 million on its payroll alone — one of the few things the Sox led the league in. According to MLB data, the Boston club made less than $3 million. All told, claims Selig, MLB lost $500 million in 2001. Said Ventura to the committee, "I have a hard time believing they're losing that kind of money and still paying the salaries they're paying."

Chipper Worth Less?
Some economists aren't convinced Major League Baseball is losing money. Zimbalist, who has studied the economics of baseball for several years, argues that the health of major-league franchises is best measured by cash flow (defined as earnings before interest, taxes, depreciation and amortization). Using an EBIDTA calculation, Zimbalist asserts that baseball lost only $232 million in 2001. By that yardstick, he says 11 of the 30 teams made money from baseball operations last year — not just 5.


But Zimbalist believes even the $232 million figure is high. He claims the league spent about $180 million last year rolling out Internet initiatives and plumping up a war chest to protect against a possible work stoppage by players. Subtract the $180 million from $232 million, and you're down to a much smaller loss of only $52 million.

Other baseball observers assert that major-league clubs artificially deflate their income. A number of teams are owned by media companies, for example. As a result, each of these clubs has an opportunity to understate the rights fee paid to the team to broadcast the games.

The Chicago Cubs, for instance, are owned by media giant the Tribune Co. The team reported $23.6 million in local media revenues from the parent company in 2001, according to data from MLB. Meanwhile, the White Sox, the Cubs' crosstown rivals, reported $30 million in rights fees. The conundrum: The Cubs are generally considered the more popular team, and their games are broadcast on WGN, a cable superstation seen in scores of markets outside of Chicago.

Likewise, the Atlanta Braves, now owned by AOL Time Warner, reported only $20 million in media revenues, even though the club was one of the most successful teams on the field in the 1990s. Further, the station that broadcasts the bulk of Braves games (TBS) is included in the basic service packages of most cable operators. Are the rights to broadcast America's Team worth 33 percent less than the rights to broadcast Chicago's second-most-popular team?

Family Comes First
Impossible to say. As Smith notes, "There's not enough detail in baseball's numbers."

And therein lies the rub. All Major League Baseball teams are privately owned. Hence, the level of reporting supplied by the league is not nearly as exhaustive as financial statements issued by publicly owned corporations such as General Motors or Wal-Mart.

Convincing Major League Baseball to supply more-specific financial information is like getting Rickey Henderson to speak in the first person. Said Sen. John Conyers (D-Mich.) at the December 6 committee meeting, "In essence, what they [the owners] have told us is, 'We lose money, but we can't trust you with the details.' "

And when it comes to baseball's accounting, the devil is definitely in the details. The $660 million that John Henry's group agreed to shell out to buy the Red Sox, for instance, seems like a huge sum for a team that hasn't won the World Series since Woodrow Wilson was in office.

But as part of the deal, the group reportedly received 80 percent of the New England Sports Network (NESN), a popular regional sports cable network that broadcasts, among other things, Bosox games. "You can strip out around half of that (purchase) price for the team," to determine the value of the club, argues John Moag Jr., president of Baltimore-based Moag & Co., a sports investment banking firm.

In fact, purchase prices for baseball teams are rarely as burdensome as they seem at first blush. Although there is no hard-and-fast rule, many new owners attribute (for accounting purposes) half the price tag of a team's acquisition to player contracts — and then amortize this figure over five years. The convention provides an attractive tax benefit for owners for the first five years following the purchase of a major-league club.

Critics like Conyers, who is seeking to eliminate baseball's antitrust exemption, also note that a team that owns the stadium it plays in, or has a contract to manage the stadium, can understate revenues from sky boxes, concessions, parking, and other in-stadium operations. At the same time, owners can bloat expenses by paying exorbitant salaries to themselves, co-owners — and even family members.

The Sheltering Skydome
If understating revenues and boosting expenses sounds contrary to the way most companies run their businesses, you're on to something.

In reality, owners who have related (or even unrelated) businesses may not necessarily mind losing money on their ball clubs. Why? For starters, they can, in certain cases, write off the losses from a baseball franchise against the gains from another business, thus sheltering profits. As the CPA Journal wrote 10 years ago in a seminal article on accounting issues for sports franchises: "Ownership may have motivations for making one segment of its business look better than another."

In fact, it's rarely in an owner's best interests to report a huge operating profit. Teams that continually report healthy earnings — and there are precious few of those — are not likely to receive tax concessions from local governments or get interest-free, state-backed financing when building new stadiums or making capital improvements.

Further, a club that carries a lot of cash on its books is inviting big-time salary demands from players. Indeed, one baseball insider notes that red ink on an income statement can be a real advantage when negotiating with agents. That's especially true if a club finds itself embroiled in a messy contract dispute with a popular player.

And as John Henry's recent sale of the Marlins shows, buying a baseball team is as much about asset appreciation as fan appreciation. The Miami-based team, which has seen a steady decline in attendance ever since the previous owner liquidated the club's best assets, sold for $158.5 million. That's about 23 percent more than what Forbes magazine said the club was worth just one year ago. It's almost 20 percent more than what Henry paid for the club.


Michael Ozanian, senior editor for Forbes who has been valuing sports franchises since the early 1990s, notes, "There is no correlation between rising team values and cash flow."

According to the most recent annual analysis by Forbes, which covers the 2000 baseball season, the Yankees are the most valuable franchise, worth $635 million. The Mets are second ($454 million), followed by Atlanta ($407 million), Los Angeles ($381 million), Cleveland ($372 million) and Texas ($342 million).

Coming up with those valuations is no small thing. Comparing one team's financial data to another can be a murky business. Many teams capitalize signing bonuses and amortize them over the contract term. But other teams expense the bonuses when they're paid. When looking at financial data supplied by Major League Baseball, it's often very difficult to determine which method a team used.

The reporting of broadcasting revenues is no more uniform. Some teams may recognize the payments as each game is played, assuring a steady, predictable stream of revenue. "It is not unusual, however, to incorporate provisions of a broadcasting transaction so as to justify the immediate recognition of advances made at the beginning of the contract period," noted the article in the CPA Journal. "Such contracts further complicate comparability of financial reporting among teams."

In fact, the only thing that's harder to understand than MLB accounting conventions is the balk rule. And that's saying something. Even Commissioner Selig anticipated flak over his numbers when he released selected financial figures for each of the 30 major-league clubs during his testimony before the House Judiciary Committee.

"I have read that the union and its economists will be skeptical about these numbers," Selig told the panel. "These numbers have been audited repeatedly, and...the union has represented that it accepts the veracity of the numbers we have presented."

The veracity, maybe. What the numbers actually mean...that's another matter. Back at Smith College, economist Zimbalist is keeping score at home. "The operating loss is really close to zero," he insists. "Baseball in aggregate is fine."




CFO Publishing Corporation 2009. All rights reserved.