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Bob Smizik: McClatchy has broken his promise to fans
The Pirates do not, as a rule, divulge their finances. Not even when a third-string shortstop signs a contract.
But one dollar figure always is available to the public through other means, and that is, perhaps, the most relevant one for a team in jeopardy of a 13th consecutive losing season:
The player payroll of $33.6 million is second-lowest in Major League Baseball.
This is no radical departure, of course. The Pirates have been at or near the bottom of that scale most of the past decade.
The difference now is that only three teams -- the Pirates, Kansas City Royals ($36.9 million) and Tampa Bay Devil Rays ($29.7 million) -- are below $40 million this season. Only five others are below $55 million. The Pirates' payroll is less than half the average of $73 million.
Where once the Pirates could point to a wide array of have-nots and primarily blame economics for their annual failures, they are increasingly stark in their isolation.
And that raises three fresh questions this year:
Why did the Pirates' payroll increase by only $1.4 million from 2004 while two teams in similar markets, Milwaukee and Cincinnati, increased theirs by more than 30 percent?
Why has the dramatic upswing in national revenues being distributed by MLB to the Pirates made little visible impact?
What is the Pirates' ownership doing with the profit it made last year and the profit it anticipates this year if it is not spending it on the players?
The only people who can answer definitively are the Pirates' owners, but they are a private company and have no legal obligation to open their books. The team rejected the Post-Gazette's request to divulge specific financial information for this article.
A Post-Gazette analysis of the team's finances -- compiled over the past two months with the help of sources familiar with the finances of the Pirates and other teams, sports economists and trade publications -- projects that the Pirates will make a $12.8 million profit in 2005. That is before debt payments, interest and taxes, and it is assuming no additional money spent on players.
The average team last season made a profit of $4.4 million, according to Forbes magazine's annual survey.
Kevin McClatchy, the Pirates' managing general partner, is adamant that the ownership group is following a prudent business course and that it is not pocketing profits.
He said the team has chosen to apply most of that profit toward a debt that is estimated by knowledgeable sources at $110 million. The rest, he added, is being used for capital projects such as the $2 million scoreboard the Pirates bought for PNC Park this year.
"Not one owner in this group is taking dividends," McClatchy said. "We put any money that we make right back in the franchise."
Sharing the wealth
MLB's current labor agreement, ratified in 2002, was the first to bring significant revenue sharing. The system requires teams at the upper end of the revenue scale, such as the New York Yankees and Boston Red Sox, to trickle down some of their locally generated money to teams at the bottom.Getty Images
Alex Rodriguez: No. 1 overall at $25.7 million in '05.
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Payrolls and average salaries for the opening-day rosters of the 30 major-league teams. Figures were obtained by The Associated Press from management and player sources and include salaries and prorated shares of signing bonuses. In some cases, parts of salaries deferred without interest are discounted to reflect present-day values. Cash transactions among the clubs are not included (For example, the Pirates are reduced to $33.6 million after cash transactions).
Pirates No. 1 Matt Lawton at $7.75 million.
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Because large-revenue owners feared their money would go directly into the small-revenue owners' pockets and stay there, a rule requires teams to spend all revenue-sharing income to "improve performance on the field." Teams that receive revenue-sharing money must file a letter of certification with MLB each April that details how they did so.
The Pirates received $1.8 million in revenue sharing in 2001, the last year before the current agreement. Last season, they received $13.3 million. This season, MLB projects that they will receive $18.1 million or more.
That is roughly $17 million the Pirates were not collecting in 2001, the year that PNC Park opened. But the player payroll has fallen by nearly $25 million since that year, when it was a franchise-high $57.8 million. The team reported a $1.2 million loss after their first season in PNC Park.
Commissioner Bud Selig said last week that MLB never has had to "confront" the Pirates or any franchise about compliance with the rule.
"There is no team that has received revenue sharing that's not spending it on the team," he said.
Bob DuPuy, MLB's president and chief operating officer, said revenue-sharing beneficiaries are not limited to using the money on major-league payroll.
"Some clubs have used the funds to directly impact their major-league roster, some have used them to sign draft choices, others to improve their minor-league system," DuPuy said. "The Pirates have clearly utilized the monies received as revenue sharing to improve their team."
It is not difficult to circumvent the way revenue-sharing spending is reported, some experts say. Owners easily can disguise which money goes where by saying that it all is lumped into one central pool. From there, they can do anything with it.
Two leading economists believe that approach is common.
"Revenue sharing has enabled teams to put more money into player payroll. But the fact is, a lot of them are not doing that," said Andrew Zimbalist, noted author and professor of economics at Smith College in Northampton, Mass. "You could be paying off debt. You could be paying front-office people. You could be expanding your facilities. Or you could be taking profits. That's what's happening in some places, and I wouldn't be surprised if McClatchy was doing it."
Allen Sanderson, economist at the University of Chicago who studies baseball's inner workings, said low-spending teams now can find a way to profit from being losers, thanks to revenue sharing.
"You have owners who are doing the right thing and making their teams better, and you have owners at the other end," he said. "You could have an owner who says, 'Hey, I can go to the bar and put nine drunks out on the field and maximize my profit.' Even a bad baseball team wins 40 percent of its games. Why should he spend an extra $50 million to win that extra game or two each week?"
Sanderson made clear he was pointing to the Pirates.
"It's conceivable that somebody could just market the ballpark as having nice views of Downtown, great food and giveaways. At that point, if you can sell that, the quality of the team might not matter at all. It might not be what the fans or taxpayers of Pittsburgh want, but it's lovely from the ownership standpoint."
In December, the Post-Gazette asked McClatchy if the Pirates had spent all of their 2004 revenue-sharing money in the minor-league system. Clearly, it was not used to boost the major-league payroll, which had decreased.
"No, we didn't pour all of it into the system," he replied. "We have spent more there than we had. Much more. But we're also trying to get the team back afloat, to balance the ship with our debt."
Paying debt is not one of the permissible uses of revenue-sharing money. McClatchy has since denied using that money to address debt.
"We are in full compliance with all regulations," he said.
One way to ensure that teams spend the money appropriately would be to implement a minimum payroll. MLB's owners offered to install a $40 million payroll floor when bargaining with the players' union in 2002. But Donald Fehr, the union chief, rejected it on the grounds that the union opposes a salary floor just as it opposes a salary cap.
Sanderson said the union has been hurt by that stance because, in his view, teams such as the Pirates are not paying as much to players as they could be.
"Donald would be better off being less consistent on that position," Sanderson said. "The league should be able to say to its member teams that there is a price of admission to participate, whether that's $40 million or even more. If you don't want to pay $40 million after you're getting revenue sharing, you're better off selling the franchise."
"The rules are in place now, but they're not being enforced by the commissioner's office," Zimbalist said. "And this just doesn't make sense when you look at teams like the Yankees and Red Sox that are putting tens of millions of dollars into McClatchy's pocket and into other pockets. The idea is to create more of a balance so that teams like Pittsburgh aren't always dragging at the bottom of the division. Eventually, people in Pittsburgh will just stop going to games, and that will hurt all of baseball."
Selig and DuPuy defended their system for monitoring how revenue sharing is spent. Selig added, though, that it will "tighten up" in the next two years.
Selig expressed confidence that revenue sharing will take a greater role in restoring competitive balance to the game as the pot grows. The total pool has gone from $169 million in 2002 to $220 million last year to, Selig projects, $300 million this year.
"There are teams today that are competitive because of revenue sharing, but there's work to be done," Selig said. "There is ample revenue sharing. Do we need more? Yes, we do."
McClatchy recently criticized some of his fellow owners for what he felt was an irresponsible increase in free-agent spending. "I don't know what happened, if they drank some funny water, but they all decided they were back on the binge," he told reporters Jan. 28.
"I'm sensitive to Kevin McClatchy's comments," Selig said. "Baseball needs to succeed in those markets. We need to succeed in Middle America. Kevin McClatchy's arguments are correct in that we can't afford to do that. We think we're on the road to resolving those issues, but there's work to be done."
Counting the money
More national money is heading to the Pirates this year than the $18.1 million in revenue sharing.
They will make $19.3 million from MLB's television contracts with Fox and ESPN. They also will receive their first annual payment of $1.96 million from MLB's recently signed 11-year contract with XM satellite radio.
MLB Advanced Media, baseball's umbrella for Internet ventures, could bring the Pirates $6 million to $8 million annually in the near future. But the team is not receiving any money from it this year.
The Pirates also do not benefit directly from MLB's luxury tax that large-revenue teams must pay for having payrolls above $128 million. That money goes into a general pool for player benefits, an industry growth fund and developing foreign talent.
Total projected national revenue for the Pirates: $39.4 million.
That is enough to cover their entire major-league payroll, with almost $6 million to spare.
At the local level, the Pirates will receive $10 million for their FSN Pittsburgh television rights and $2 million for their KDKA-AM radio rights.
Revenue from ticket sales will not be known until after the season, but it is not difficult to project.
In 2001, when all teams opened their books for Congressional hearings, the Pirates reported $48.6 million in ticket sales after averaging a franchise-record 30,837 fans in PNC Park's first year. The average ticket price that year was $19.51, but the team's actual take at the gate was $19.95 per patron when luxury seats were included.
The average ticket price today is $17.08. Average attendance last season was 21,107, but season-ticket sales are up by 2,000 this year, which points toward a general attendance increase. If the team were to average 23,000, including the luxury seats, that would bring $32.6 million.
There also is revenue from ballpark concessions, advertising, a $2.3 million payment from PNC for naming rights, minor parking revenue and other ancillary income. In 2001, the Pirates reported $26.2 million in such income. Taking 76 percent of that figure to account for the drop in attendance -- then adding 4 percent to account for increases in the price of concessions and other variables -- the adjusted projection for this year would be $20.9 million.
Total projected local revenue: $65.5 million.
Grand total for revenue in 2005: $104.9 million.
The total revenue reported by the team in 2001 was $108.7 million.
The Pirates' expenses beyond the major-league payroll include the partial funding of their minor-league system, signing bonuses of draft picks that can reach seven figures, travel costs, salaries of front-office staff and $11.5 million to operate and maintain PNC Park. The latter is the team's second-largest expense. This year, the team also budgeted $3 million for capital projects, including PNC Park's new scoreboard, and $775,000 to major-league players whose contracts were bought out last season.
In 2001, the Pirates reported the sum of those types of expenses to be $58.5 million.
If that figure is the same this year -- the Pirates had 11 front-office layoffs in 2003 and PNC Park has reduced its usher staffing by more than a quarter, but the costs of scouting, developing talent and maintenance of facilities has risen industry-wide -- that would put total expenses at $92.1 million, including the major-league payroll.
That would leave an unspent $12.8 million.
Roger Noll, a professor at Stanford University with a specialty in sports economics, described that amount as "marginally profitable."
That excess could be wiped out quickly, too, if the Pirates choose.
General manager Dave Littlefield is authorized by the owners to increase the major-league payroll up to $40 million, should he choose to acquire new players. When other expenses are counted, that leaves Littlefield about $4 million in real wiggle room.
Another variable is how much the team elects to use to pay down debt. The Pirates' estimated debt of $110 million -- about $10 million less than the industry average -- generally would require an annual payment in the range of $6 million.
Debt includes all future years of contracts and deferred payments owed to players, as well as stadium cost overruns and general loans. All are issues for the Pirates. They owe $25.1 million in future contracts and deferred payments, and they still owe toward their share of the $44 million they were required to contribute toward PNC Park construction.
McClatchy, who has said that the Pirates lost $30 million in their first three years in PNC Park, described the team's debt as manageable, but he made clear he would like to reduce it.
"We're better off, I think, if we go ahead and pay down debt than if we put it into one $3 million player who isn't going to make an impact for us right now," he said. "This is the part that people aren't going to like to hear, but I'm not going to let happen to this franchise what happened to the Pittsburgh Penguins under their previous ownership."
The Penguins declared bankruptcy in 1998.
"We've done the difficult part," he added. "I see things improving from here."
McClatchy said ownership's plan is to address debt so that the Pirates can stay within MLB's required debt-to-franchise-value ratio of 40 percent and be able to sign young standouts such as Oliver Perez and Jason Bay to long-term contracts. The Pirates narrowly are in compliance with the ratio now, according to multiple sources.
McClatchy cited the Aramis Ramirez trade of two years ago as a "glaring example" of the team's failure to follow such a path. Ramirez was dealt to the Chicago Cubs for much less than his worth because the Pirates were under pressure to move salary quickly to fall into debt compliance.
"I think we're getting into shape now where we can sign who we want to sign out of our group," McClatchy said. "I think we need to keep these guys that we have, and I think we will. I see things getting brighter. I see us going in the right direction."
The Pirates have another large chunk of revenue coming their way soon, although it will be a one-shot deal.
The Washington Nationals franchise is owned by the Pirates and the other 28 teams, who united in 2002 to buy it for $120 million when it was the Montreal Expos. That franchise is for sale with a price tag of $350 million. At least seven individuals or groups have filed applications to enter the bidding, and a sale is expected by July.
The Pirates' profit if the asking price is met would appear to be $7.94 million, but the Expos/Nationals have incurred additional expenses since the original purchase. That money will be deducted from the sale profit.
Closing the books
The Milwaukee Brewers are the Pirates' cousins in too many ways.
They share 12-year losing streaks that are the longest current slumps in any of the four major professional sports. They moved into their new ballparks in the same year, 2001. They promised their fans that those facilities, funded mostly through tax money, would allow them to compete with the big spenders. And they failed to deliver. On and off the field.
Attendance soared in the Brewers' first season at Miller Park, but when the team performed poorly, attendance dropped dramatically. That brought huge losses and forced ownership to infuse capital of $11.7 million the year after the stadium opened. The franchise's debt reached a peak of $171.3 million.
Citing those hardships, ownership dropped the payroll last year to $27.5 million, lowest in baseball.
There are two differences, though, between the Brewers and Pirates.
One is that the Brewers' payroll is up to $40.2 million this season, a 46 percent increase. Cincinnati, another National League Central Division rival, did likewise, the Reds raising theirs from $46.6 million to $61.9 million, a 32 percent increase.
Two is that the Brewers have addressed the public's concerns about their finances by opening their books.
Last year, the team ceded to intense pressure and allowed two panels -- one from the Wisconsin legislature, the other a group of business executives -- to audit nearly every aspect of its finances from 1994-2003, even executive pay. The Brewers said they wanted taxpayers to understand that they were not pocketing national money or the rewards from the new stadium. MLB officials called the act unprecedented.
The Pirates' choice to keep their books closed, despite the public subsidizing of PNC Park, is their own. DuPuy, the MLB president, said, "The decision to publicly disclose club finances is entirely up to the individual clubs."
The same is true of the Reds, who made a profit of $10 million last year and will not discuss payroll, even now that they have boosted it.
There is another difference between the Brewers and Pirates.
The Brewers have a new owner, Los Angeles investor Mark Attanasio, who bought the team for $220 million in January from the Selig family, which had owned it for decades. Attanasio immediately boosted the payroll, then, last week, signed star pitcher Ben Sheets to a four-year, $38.5 million deal. He predicted that payroll could increase to as much as $55 million within a year or two. He also called for additional investors to help address the team's debt of $100 million.
The Pirates are not for sale. McClatchy allowed in December that "there could be a time when I look at taking myself out of this job," but he added that he had no plan to consider altering his role until after 2006, when the Pirates will play host to the All-Star Game.
A decision to sell the franchise would not be McClatchy's alone, even though he is the only voting member of the four-man board of directors who has two votes. Limited partner G. Ogden Nutting, a West Virginia newspaper publisher, has had a greater influence in the franchise's workings in recent years. He increased his stake with a capital infusion last year and had his son, Robert Nutting, added as a limited partner. The other limited partner is North Carolina businessman Donald Beaver.
If they were to sell, the owners could expect quite the payday. McClatchy and his original partners bought the Pirates for $90 million in February 1996. The team had the lowest revenues and attendance in baseball just before that and shared Three Rivers Stadium with the Steelers.
Because of PNC Park, the franchise reasonably could be expected to bring a price similar to the Brewers' $220 million. Forbes magazine estimated the Pirates' current worth at $218 million.
Three Rivers Stadium
Average ticket price
$ 9.1 million
Average ticket price
Note: All figures for current year are through Friday.
Dejan Kovacevic can be reached at firstname.lastname@example.org or 412-263-1938.