January 24, 2002

The Numbers (Part Five)

National and Other Local Expenses

by Doug Pappas

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The black hole of MLB's financial disclosures is titled "National and Other Local Expenses." This category includes all operating expenses other than those associated with players on the 40-man roster. Legitimate expenses in this category include salaries for managers, coaches, and scouts; signing bonuses for draftees and foreign free agents; the farm system; stadium expenses; front-office payrolls; and the cost of operating Major League Baseball's central office in New York.

Except for stadium expenses, these categories are largely the same from club to club. Everyone has about the same number of coaches, maintains the same number of minor league teams, and contributes the same to keep MLB's lawyers, lobbyists, and PR people working overtime to undo the damage created by Commissioner Bud Selig's every utterance. But as the table below shows, some teams spend twice as much as others to perform the same tasks.

Some of the differences make sense. Good teams generally spend more on scouting and pay their coaches more. Investing in the farm system is among the most cost-effective ways to improve any team, and the single best investment any club can make is a top-quality front office. Despite their cable-television riches, the Yankees staggered through the early 1990s before the suspension of George Steinbrenner allowed Gene Michael and Bill Livesey to lay the foundation for their latest dynasty. The difference between a system run by Billy Beane and one run by Cam Bonifay is at least $20 million a year.

Two of the three highest-overhead teams have unique expenses. The Mariners paid $13.1 million for negotiating rights to Ichiro Suzuki, and the San Francisco Giants must pay $20 million annual debt service on Pacific Bell Park. They're joined in the stratosphere by the Dodgers, who own and maintain Dodger Stadium, and the two New York teams, whose executive offices must feature 14-karat-gold plumbing fixtures. The Pirates' high costs are also presumably inflated by expenses related to the opening of their new park.

Suspicious discrepancies abound. Although the Rockies, Cardinals, Orioles, and Cubs all report comparable revenue, the Rockies spent $15 million more than the Cardinals and $18 million more than the Orioles or Cubs. The Expos' layout of $35 million is probably close to the minimum any club can reasonably spend; plenty of teams spend $15 or $20 million more that that to no apparent effect.

Then there's the Athletics. Only three clubs spent less on their front office, yet only one club had a better record in 2001. The A's aren't skimping on the essentials: their farm system remains strong, their mid-level executives are being hired away and promoted by other clubs, and with the Bay Area's high cost of living, they can't be underpaying their clerical employees relative to other organizations. Yet the average club spends almost 50% more than the Athletics to achieve far less. If every club were to reduce its non-stadium-related overhead to Oakland's level, MLB would save more than $500 million. That they haven't is strong evidence that MLB is exaggerating its financial difficulties. (More on this below.)

In fact, Selig's numbers can hide a multitude of accounting tricks, such as expenses unrelated to baseball or intended to benefit the owner in other ways. While insisting that the numbers given to Congress and the public told the full story, Commissioner Selig refused to let the MLBPA talk about such expenses. Perhaps he's learned from the owners' experience in 1985, when Commissioner Peter Ueberroth directed the owners to open their books to the MLBPA without such a strict confidentiality agreement. The MLBPA consultant, Stanford economist Roger Noll, found the following items in the clubs' 1984 books:

• The Yankees' books included $700,000 of depreciation on a hotel owned by the club, and the club spent twice as much as the average club on travel.

• The Cubs, whose owner also controlled the city's dominant newspaper and independent TV station, spent three times the MLB average on advertising.

• The White Sox, who owned their own pay-TV outlet, spent $700,000 on interest and production costs for these cablecasts while receiving no rights fees in return.

• The Athletics' owner used the team as an investment vehicle, reporting on the team's books a loss of $831,000 from the sale of marketable securities.

• The Orioles spent $2 million on stadium expenses unrelated to baseball activities.

• The Dodgers paid their executives four times the industry average, and twice as much as any other team.

Are clubs still playing such tricks? There's no reason to believe they aren't, particularly since MLB refuses to let those who have seen behind the reported numbers talk about what they found.

Even MLB's own figures provide damning evidence that MLB has grossly exaggerated its economic problems. One of the recent disclosures was an "Updated Supplement to the Report of the Independent Members of the Commissioner's Blue Ribbon Panel on Baseball Economics." This document, which purports to document how spiraling player salaries have caused mounting losses, actually shows that over the six years covered by the report, non-player expenses have risen faster than player salaries.

The figures for revenues, player salaries and operating losses in the table below (all dollar figures in thousands) come from this report; the "other expenses" column was computed from the other numbers.

Source: MLB Updated Supplement to The Report of the Independent Members of the Commissioner's Blue Ribbon Panel on Baseball Economics, December 2001.

Think about it. MLB admits that its annual revenues have risen 156% since 1995--an extra $2.1 billion per year for the clubs to spend. MLB's numbers show that the players have received less than half of this new money, while over this six-year period, non-player operating expenses have risen 134%, or more than $1 billion.

Where is this money going?

We know where it's not going. Teams aren't operating more farm clubs. They haven't doubled the salaries of their scouts, ticket agents, or secretaries. Stadium rents haven't doubled. With inflation running only 17% from 1995 to 2001, clubs aren't paying twice as much for supplies and equipment.

If, as the owners claim, MLB is hemorrhaging money, why haven't they tried to stop the bleeding? Why are non-player expenses continuing to increase far faster than inflation? Why won't Bud let anyone who knows the facts talk about these costs?

Unless and until the owners provide credible answers to these questions, their claimed "losses" are about as believable as Enron's September 2001 financial statements.

Next time: revenue sharing, team profitability and even more irrelevant "losses."

Doug Pappas is chairman of SABR's Business of Baseball Committee. His writings on the subject are archived at http://roadsidephotos.com/baseball/. Although his early professional experiences included helping the USFL win $3 in its antitrust suit against the NFL and watching Bowie Kuhn flee to Florida one step ahead of his bankrupt firm's creditors, he continues to practice law in New York.