As noted in my last column, operating losses account for only $232 million of the $519 million Major League Baseball claims to have lost in 2001. Another $112,491,000 represents net interest expenses. Here's how the interest was distributed:
Team Interest Chicago Cubs $4,665,000 Chicago White Sox $2,263,000 New York Mets $2,152,000 Kansas City Royals $1,611,000 Atlanta Braves $1,139,000 Toronto Blue Jays $593,000 Boston Red Sox $51,000 Philadelphia Phillies ($239,000) Seattle Mariners ($682,000) St. Louis Cardinals ($962,000) Florida Marlins ($1,640,000) Colorado Rockies ($2,078,000) Cincinnati Reds ($2,633,000) San Diego Padres ($2,815,000) Montreal Expos ($2,835,000) Cleveland Indians ($2,869,000) Houston Astros ($3,056,000) Oakland Athletics ($3,939,000) Minnesota Twins ($4,327,000) Pittsburgh Pirates ($4,677,000) Anaheim Angels ($4,978,000) New York Yankees ($6,089,000) Texas Rangers ($6,815,000) Milwaukee Brewers ($7,128,000) Tampa Bay Devil Rays ($7,421,000) Arizona Diamondbacks ($7,774,000) Baltimore Orioles ($8,385,000) San Francisco Giants ($12,831,000) Los Angeles Dodgers ($14,437,000) Detroit Tigers ($16,354,000) TOTAL: ($112,491,000)
The positive figures are no surprise. Every club–well, every one but the Expos–starts the season with an eight-figure bank balance, thanks to advance sales of luxury boxes, season tickets, and single-game seats. By the time the players start to collect their salaries, this money has been earning interest for months.
Thus, to estimate the interest actually paid by the other clubs, their reported interest expenses must be adjusted to reflect the offsetting interest income. This presupposes, of course, that interest earned on season tickets and luxury boxes is actually reported on the team's balance sheet… which doesn't appear to be the case for the Boston Red Sox. It's hard to imagine how the Red Sox, a club with no long-term debt, could have netted just $51,000 interest on local revenues of more than $150 million.
Since the two Chicago teams reported the most interest income, I'll use the average of their effective interest rates to estimate the total interest received by all 30 clubs. The Cubs earned 3.59% interest ($4,665,000 on total operating revenues of $129,774,000); the White Sox 2.03% ($2,263,000 on $111,682,000), for an average of 2.81%. Multiplying this rate by MLB's gross revenues of $3,547,876,000 yields an estimate of almost exactly $100 million in interest revenue–$99,695,000, to be precise. Since MLB reported net interest expense of $112,491,000, the 30 clubs paid more than $210 million in interest during 2001.
MLB didn't disclose the total debt on each club's books, but Forbes has estimated each club's debt-to-value ratio for the 2000 season. Because the debt calculated by Forbes includes the value of deferred payments due on player contracts, it can't directly be used to estimate clubs' 2001 interest payments. However, Forbes' estimate that the average club was worth $263 million and had debts equal to 40% of its value suggests an average debt, including deferrals, of $105 million and total debt of $3.15 billion.
This sounds ominous, but it's not. First of all, many of these debts reflect major investments in the club's future. A number of clubs, led by the Giants and Tigers, borrowed heavily to finance all or part of new parks which have significantly increased local revenues. The Yankees reported $6 million in net interest expenses even though their reported profits were more than George Steinbrenner's group paid for the team in 1973: that borrowing was used to finance YankeesNets, a holding company that also owns the NBA Nets and NHL Devils.
Other "debts" are actually intra-company accounting transactions. The Angels and Dodgers both reported millions of dollars in interest payments, though it's safe to say that neither Disney nor News Corp. borrowed the money to buy their clubs from the local bank. MLB's richest owner, Carl "Contract Me!" Pohlad, seems to have done something similar with the Twins, since he claims to be paying over $4 million a year in interest on a club he bought 18 years ago for a reported $34 million.
In most cases, though, the interest expenses seem to involve money borrowed by the owner to purchase the club. Although MLB rules require purchasers to pay at least 60% of the purchase price in cash and finance no more than 40%, that 40% can still come to $50 million or more. Banks have been quite willing to lend the money, since for all the owners' whining, a major-league baseball franchise remains a solid investment. In the free-agent era, no club has ever been sold at a loss, while Forbes estimates that the average franchise has appreciated at the rate of 11% a year under its current ownership.
Finally, some clubs have borrowed to cover operating losses. This is a really, really stupid thing to do on a regular basis, the baseball equivalent of taking out a second mortgage on your house to pay for your vacation. When really, really stupid behavior is involved, can Bud Selig be far behind?
Selig's group bought the Brewers in early 1970. Twenty-five years later, when the Brewers had to come up with the $90 million they had pledged towards the cost of a new ballpark, local officials were staggered to learn that four banks already held liens on the club, leaving it with no collateral against which to borrow. (This was about the time of Selig's now-infamous bridge loan from Carl Pohlad's bank.) During the final negotiations over stadium financing, local officials feared that unless a deal could be reached the Brewers might move to Charlotte, home of NationsBank, the club's largest creditor. This epic feat of fiscal mismanagement may explain Selig's obsession with increased revenue sharing, but it only raises additional questions about his fitness to serve as commissioner.
MLB describes the remaining $174,234,000 of losses as "non-operational charges such as amortization of debt." "Amortization of debt" refers to the tax break that has long subsidized the ownership of professional sports franchises. The purchaser of a major-league team is allowed to attribute half the purchase price to the acquisition of player contracts, then write off the value of these contracts over five years.
So if Donald Watkins buys the Minnesota Twins from Carl Pohlad for $150 million, for tax purposes $75 million would be treated as the price of the Twins' franchise (a nondepreciable asset), the other half as the cost of acquiring the contracts of the players signed to play for the Twins. Watkins could then write off the value of the contracts, reducing his taxable income by $15 million/year for the next five years. As such paper "losses" reduce the owner's tax liability without costing him any actual money, they are actually a net benefit, not a cost. These "$175 million of losses" thus mean that the owners who claim them are enriched by $60 million or more.
In my next column, I'll explain the likely effect of the owners' current labor proposal on team payrolls and profits, and why that proposal could actually reduce the competitive balance the owners claim to be protecting.