Winter 2002: MLB's Latest Unconvincing Financial Disclosures

In connection with Commissioner Bud Selig's December 6 testimony before Congress, Major League Baseball released a set of financial data purporting to show losses of $518,966,000 on record revenue of $3,547,876,000. Not one of the 42 respondents to this year's Committee survey accepted Selig's claim that these numbers accurately and meaningfully depicted the true state of MLB's finances. Members of Congress were equally dismissive, with Rep. Maxine Waters reminding Selig that he was under oath.

Rep. Waters' reminder came as Selig was simultaneously insisting, "you have all the statements, all the numbers," and refusing to allow MLBPA representative Steve Fehr discuss the more detailed breakdown, including related-party transactions, provided to the MLBPA in confidence. And while he repeatedly cited last year's Blue Ribbon Panel report, Selig never explained why MLB had chosen to ignore its conclusion that contraction was unnecessary.

Even taken at face value, MLB's numbers don't support Selig's claims of a $519 million loss. Less than half this sum, $232 million, represents claimed operating losses. I've discussed these figures at length in a series of columns on baseballprospectus.com in brief, the revenue figures are understated by at least the local value of superstation contracts; related-party transactions are taken at face value rather than valued at market value; and reported "local expenses" vary so widely as to compel the conclusion that the majority of clubs are either spectacularly inefficient or paying huge amounts of money to their top executives.

Another $112.5 million consists of interest expenses. As reported, these include the money YankeeNets used to acquire the NHL New Jersey Devils; the money Carl Pohlad, Disney and News Corp. "borrowed" from themselves to acquire the Twins, Angels and Dodgers, respectively; and Commissioner Selig's own masterful fiscal management of the Brewers, where he parlayed an asset costing $10.8 million in 1970 into one which 25 years later was so riddled with debt that it couldn't borrow the money to finance its own promised contribution to a new ballpark. More fundamentally, interest expenses represent a financing choice irrelevant to the clubs' operating performance, and should be ignored for purposes of evaluating the owners' cries of poverty.

"Non-operational charges such as amortization of debt" account for another $175,234,000. "Amortization of debt" is another term for the tax break which allows the purchaser of a major league team to attribute half the purchase price to the acquisition of player contracts, then write off the value of these contracts over five years. Since these writeoffs are used to offset the purchaser's other income and thereby reduce its tax liability, these "$175 million of losses" would be more accurately described as an economic benefit worth $60 million or more.

When viewed in context, the owners' 2001 numbers appear even less persuasive. MLB's own disclosures show that total revenues have risen 156% since 1995, the first year for which figures are available. Over that period, player salaries have increased by 113%, while other expenses have jumped 134%. If MLB were truly so unprofitable, why are these clearly controllable expenses rising even faster than the "uncontrollable" player salaries? Commissioner Selig has never even tried to answer that question.

Copyright © 2002 Doug Pappas. All rights reserved.
Originally published in the Winter 2002 issue of Outside the Lines, the SABR Business of Baseball Committee newsletter.


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