Part 1: Franchise's profit level well below most estimates, and management insists all of it went back into baseball
December 7, 2009 2:45 AM
Gene J. Puskar/Associated Press
Pirates president Frank Coonelly.
By Dejan Kovacevic Pittsburgh Post-Gazette
INDIANAPOLIS -- The Pirates have made less than $11 million in profit over the past two years, and all of that was channeled back into baseball, team president Frank Coonelly told the Post-Gazette.
Coonelly, eager to dispel mounting charges that the franchise puts big profits above winning, broke from the team's long-standing policy of not discussing finances to disclose in a series of interviews last week that the Pirates put all their profit in that span toward $11 million in baseball-related capital investments and, even then, needed to incur additional debt to cover the rest of the amount.
The Post-Gazette's two-part series on the Pirates' finances
• Monday: The Pirates made less than $11 million over the past two years, and that all of the profit has gone into baseball-related capital investments.
• Tuesday: Where, exactly, did that profit go? And what of next year, when payroll could drop even further?
Those capital investments included a $5.4 million baseball academy in the Dominican Republic, $2 million toward the renovation of the Pirate City complex in Bradenton, Fla., and the recent purchase of a new Class A affiliate to play in Bradenton.
"The Pirates utilize every dollar we receive in our effort to build a winning club," Coonelly said.
All that information, Coonelly added, has been documented, audited and, as per standard procedure, can be seen by their professional peers.
Although the Pirates are a private company and have no obligation to divulge finances publicly, they are required to share their books with Major League Baseball, all 29 other teams and the players' union. That means that all figures Coonelly shared with the Post-Gazette can be cross-checked by any of those entities, including the more specific figures that led to them.
An annual profit of $5.5 million, which is how the team's past two years would average at their highest, would be considered marginal in professional sports. And it would be well below the most prominent published estimates, made each year by Forbes magazine, which many sports executives say has no access to any franchise's books: Forbes showed the Pirates making a $17.6 million profit in 2007, $15.9 million in 2008.
Coonelly described the Pirates' formula for calculating their profit, a common one in business, this way:
The first figure is operating income, which is simply money in vs. money out. He would not divulge that figure for either year but characterized the 2009 figure as "significantly" lower than $14 million.
Next, any cash paid on debt is subtracted. In the Pirates' case, the cash paid on debt -- roughly $6.5 million each of the past two years -- has covered nothing more than interest charges on debt of a little more than $100 million, Coonelly said. The Pirates have made no payments on the debt's principle the past two years and, in fact, the debt has increased slightly because of those capital investments.
The team elected to fund the capital investments through profits for two reasons, Coonelly said: One, there was not enough money in standard baseball operations. Two, they could extend those investments over long periods for tax purposes.
Also visible in the team's books, Coonelly said, is that no ownership dividends have been paid the past two years, and no money divested to outside ventures.
Bob Nutting, the Pirates' controlling owner since January 2007, confirmed that. He also praised Coonelly and general manager Neal Huntington, the men he hired later that year, for their work since then.
"I have put the plan in place, hired the right people and will continue to provide the necessary resources to see that plan through," Nutting said yesterday. "We've been been extremely effective over the past two years in carrying out our plan as we put ourselves in position to compete for the playoffs on a consistent basis."
The Pirates declined to break down specific profit figures for each of the past two years, other than to acknowledge a profit was made each year.
"While the Pirates turned a profit in 2009, all of the free cash generated by our operations was reinvested in the club," Coonelly said.
Baseball's Winter Meetings begin today at the Indiana Convention Center with the Pirates the recent focus of national discussion in the sport, largely because of publicly stated views on their finances.
In mid-November, Scott Boras, the sport's dominant agent, told the Boston Globe that some teams are receiving $80 million-$90 million from MLB's various national contracts and revenue-sharing pool before any local revenues are counted, including ticket sales. Boras also charged teams with using the revenue-sharing money for paying down debt, which is not allowed.
"If I'm a fan, I really have to question it and look at the history of my franchise and the others and evaluate what commitment each franchise is making," Boras said.
Boras did not mention the Pirates, but they clearly were among those implicated: Their major league payroll for the 40-man roster in 2009 was $49 million, third-lowest in baseball, they have acknowledged making a profit each of the past six years, and they are among MLB's top revenue-sharing recipients.
When ESPN challenged Boras on his figures of $80 million-$90 million, he cited an August article in the New York Daily News. That article, citing unnamed sources, described the Pirates as receiving $75 million in national monies.
Boras declined to be interviewed for this article.
Next, John Henry, owner of the high-spending Boston Red Sox and former owner of the low-spending Florida Marlins, told the Globe, without singling out any team, "Change is needed, and that is reflected by the fact that over a billion dollars have been paid to seven chronically uncompetitive teams, five of whom had baseball's highest operating profits. Who, except these teams, can think this is a good idea?"
And those two hardly have been alone, as local newspapers, talk shows and Internet forums have made the Pirates' finances maybe the top topic regarding the team.
MLB's national monies are distributed annually in two forms:
One is the Central Fund, a collection of all national television, radio, Internet and merchandise properties. That check, for each of the 30 teams, was $40 million this year, but each team had to pay $10 million in national pension and operations fees out of that.
Thus, the Pirates' Central Fund check was $30 million.
The other is revenue-sharing: MLB collects 34 percent of local revenues from all 30 teams -- a $416 million total this year -- and distributes that to its lowest-revenue franchises through a check, with a stipulation that it must be spent on making the team "competitive." Teams must write a letter each winter detailing how the money was spent, and MLB, the other teams and the players' union receive a copy.
The Pirates' revenue-sharing check was $36 million.
The two checks together totaled $66 million, which is 12 percent below the $75 million stated in the Daily News report and about 30 percent below Boras' range.
"The union takes seriously its role of reviewing how clubs spend their revenue-sharing dollars in an effort to improve on-field performance," Coonelly said. "The Pirates take this requirement just as seriously."
The Pirates have what is considered a good local broadcasting contract for Pittsburgh's size, at roughly $15 million, so they have $81 million before any tickets, sponsorships or other PNC Park revenues are counted. But all MLB teams also have expenses above major league payroll, generally in the range of $50 million-$60 million, including for the draft, international signings, administration, managers and coaches at all levels, scouts, equipment, travel and stadium maintenance.
The latter figure usually is the largest, and the Pirates' cost at PNC Park -- believed to be in the range of $12 million-$15 million -- is no exception.
The Daily News also reported that the Pirates would make a $14 million profit in 2009, a figure that Coonelly called "significantly higher than even our operating income before interest is paid and far, far higher than our income after interest."
Coonelly took umbrage with the comments made by Boras, a longtime nemesis dating back to Coonelly's decade working at MLB headquarters as a labor counsel, and Henry of the Red Sox, for whom he professes a deep respect.
"What I really care about is not what some agent believes and, quite frankly, what some owner says after he used to advocate quite eloquently in favor of revenue sharing when he owned a team in Miami," Coonelly said. "What I care about is what our fans think about what we're doing here in Pittsburgh."
In Henry's interview with the Globe, he called for eliminating the revenue-sharing system when baseball's labor agreement expires in 2011 and replacing it with a stringent luxury-tax system that would require all teams to have a minimum payroll, or salary floor.
"Even though Mr. Henry apparently believes there's too much revenue sharing -- the revenue sharing that has allowed baseball to continue in great baseball cities like Pittsburgh, Kansas City, Cincinnati and others, including Miami -- to get to baseball's average payroll, you have to be spending $103 million on the 40-man roster," Coonelly said. "So, even that system that at least one owner is preparing to scrap isn't nearly sufficient. As a result, we have to build our team much differently than the Red Sox, who can afford a $140 million payroll."
Nutting declined to respond to Henry's remarks.
"I have a great deal of respect for Mr. Henry and all of my fellow owners," Nutting said.
In September, the Post-Gazette asked Bud Selig, baseball's commissioner, if the Pirates were making profits similar to those estimated by Forbes.
"Absolutely not. Unequivocally not," Selig replied with a raised voice. "I'm telling you, they're not pocketing it. I mean, it's just an economic myth."
Selig added that neither the union nor any team has approached him formally about the revenue-sharing spending of any team, though he and others have acknowledged informal talks between the commissioner and union on such topics.
"I've never had a complaint," Selig said.
Selig and the owners offered to install a salary floor during 2006 labor talks, but the union balked on the principle that, if it accepted a floor, it must also accept a cap. Baseball is the only one of the four major professional sports that does not cap team payrolls. The World Series champion New York Yankees just spent $215 million on payroll, with Florida coming up last at $37 million.
Mike Weiner, the union's newly named executive director, said on a conference call Wednesday that the union's stance on the floor has not changed and that it prefers to handle issues of low-spending teams "through other means."
"We've had discussions with the commissioner's office on various clubs for many years under the revenue-sharing plan," Weiner said. "I would imagine that again will be an issue in 2011."
Weiner added that the union is open to short-term exceptions for teams building around young, low-cost players, so long as the team eventually spends more.
More questions in 2010?
The Pirates, 62-99 in 2009, have had 17 consecutive losing seasons. And they will fall into that young, low-cost category next summer, with precious little experience, some promising talent such as outfielders Andrew McCutchen and Garrett Jones, and a payroll currently projected to fall to $34 million. The latter might end up the lowest in baseball.
Although this divulging of financial figures was a first under this ownership group -- Nutting took control in early 2007 -- many in the team's increasingly disillusioned fan base surely will want more.
Nutting was asked: Why not simply open the books to the public?
"Like every other private company, our books are not open to the public," Nutting replied. "However, they are open to the commissioner, as well as the players' union. I am confident that they fully understand we have appropriately invested in all levels of our baseball operations budget."
Coonelly made clear throughout his interviews that he wished public attention would turn away from the Pirates' finances.
"I think it receives far more attention than it deserves, quite frankly," he said. "What should be the focus is: Are we making good, sound baseball decisions? You cannot simply look at the money spent on major league payroll and reach conclusions as to whether this organization is making sound baseball decisions."
He reiterated his long-held view that previous, if previous management had shifted money from major league payroll to scouting and development as his group has, the team would be in a far better baseball position today.
"For far too long, the Pittsburgh Pirates, much like the media, were solely concerned with what major league payroll looked like. In doing so, they neglected to make the long-term investments critical to a team in a market like ours. Investments weren't made throughout the organization or the draft or the international markets like the Dominican. That's what we need to compete with the big boys."