Part 2: Nutting, minority owners not getting dividends, as team invests in infrastructure, draft, development with eye to future
December 8, 2009 10:00 AM
Peter Diana / Post-Gazette
Third baseman Pedro Alvarez was the Pirates' first-round pick in 2008.
By Dejan Kovacevic Pittsburgh Post-Gazette
INDIANAPOLIS -- So, where is the Pirates' profit going?
A good place to start might be where they are adamant it is not going: in the owners' pockets or in any of controlling owner Bob Nutting's other business ventures.
"What is critical for the Pirates' fans to know," team president Frank Coonelly said, "is that we are investing all available resources from our operations, whether local or national, back into the club in our effort to return a winning baseball team to the city
The Post-Gazette's two-part series on the Pirates' finances
The Pirates maintain that neither Nutting, who is believed to have a controlling interest approaching three-quarters, nor anyone in the ownership group has been paid dividends related to the past two years. Neither has Nutting drawn any salary.
Not all of the minority owners are pleased, apparently: One minority owner, who declined to be identified, described a meeting several months ago in which the minority owners were denied distributions to cover taxes they owed on the team. Some owners promptly left the room.
Nutting and others in management stressed that, despite this incident, there is no disharmony in the ownership group.
Nutting also said that none of the Pirates' money has ever been diverted to his or his family's other prominent local holdings, including the Seven Springs Resort and the Ogden Newspapers chain founded by his father, Ogden Nutting.
"No, each operates as an independent organization," Bob Nutting said. "We continue to operate efficiently and effectively at both Seven Springs and Ogden Newspapers, and both are performing very well."
The Post-Gazette reported yesterday that the Pirates made less than $11 million in profit the past two years. The team made $11 million in baseball-related capital investments in that span, Coonelly said last week, and used its profit plus a "modest" amount of incurred debt to cover that.
Coonelly, who has refused to give the Post-Gazette profit figures, clarified yesterday that the team also made, out of its operating income, "significant" capital investments in PNC Park, as well as other payments related to taxes and interest in that span.
In the past two years, since Nutting hired Coonelly and general manager Neal Huntington, the amount spent on payroll for the 40-player roster -- by far, the largest and most visible expense because individual players' salaries are made public -- dipped from $51.4 million in 2007 to $50.7 million in 2008 to $49 million this year. The 2009 dip was due mostly to the midseason trades of their three most expensive players: Jack Wilson, Freddy Sanchez and Adam LaRoche.
The Pirates' local revenues also have fallen in the past two years. Coonelly did not characterize the amount. From 2008 to 2009, attendance dropped 1 percent to the smallest average crowd - 19,040 - in PNC Park's history. The team also sold fewer suites and lost at least one major sponsorship.
Despite that, Coonelly said, several baseball operations expenses were boosted in the past two years:
• The Pirates spent $18.7 million on the past two drafts, compared with $10.4 million the previous two years. That two-year total was among the highest in the majors, and it included the signing of Pedro Alvarez, their No. 1 draft choice in 2008, to a franchise-record $6.355 million contract that year.
• The international amateur budget was increased from $1.13 million in 2007 to $2 million in 2008 and then to $3 million this year. The team also had authorized Latin American scouting director Rene Gayo to offer Miguel Angel Sano into the $3 million range, but Sano chose the Minnesota Twins at $3.15 million. A Sano signing would have counted above the international budget, Coonelly said.
• Overall player acquisition costs in the draft and international signings increased 70 percent since 2007.
• Player development spending increased 25 percent since 2007. That includes a 9 percent increase last year while the industry as a whole decreased.
• Spending on scouts increased 20 percent since 2007, including for nine additional full-time North American scouts for the draft, a total of 25, and a near-doubling of the international scouts from 20 to 39. Those scouts now cover 39 countries across six continents.
All of that, Coonelly said, is aimed at positioning the Pirates to build from within, where premier talent is cheapest and, because a team controls a player's rights for six years from the time he begins in the major leagues, there is a chance to match talent for talent with the higher-revenue teams that acquire such talent largely through free agency.
And next year, to be sure, that talent will come mostly cheap: The Pirates' 2010 payroll, even with the recent acquisition of $4.85 million second baseman Akinori Iwamura, currently projects to $34 million. Given that the Florida Marlins had the majors' lowest payroll this year at $37 million, the Pirates might represent the new bottom.
They also might not -- Coonelly has said Huntington has ample leeway to add talent this offseason -- but the club president said that the team will not force the issue if adding a player does not fit with the current roster.
But if they do have something in the range of that $34 million payroll? Even if other spending continues to increase, the Pirates probably will project to have a larger profit, and questions will rise anew.
"I hope that we've been very clear about our long-term vision," Coonelly said. "Where we'll start the season, in terms of our payroll, is consistent with that vision we've laid out for our fans. While I suspect there will be some grumbling nationally if we don't increase our payroll from what the current roster would earn, the fans in Pittsburgh won't be surprised and, I hope, will support a good, young group of players as they come together."
One option at some point will be paying down some of the team's $100 million-plus debt, which is largely the result of losses earlier in the decade. Coonelly said that if the Pirates can begin paying down some of that debt -- they instead have added to it slightly each of the past two years through those capital investments -- that could help keep some of the team's promising youngsters even into their free-agent years.
"Paying down debt at some point will make us a stronger organization and allow us to do much more as we go forward," Coonelly said.
MLB enforces compliance with a debt-to-equity ratio for all teams.
Andrew McCutchen, the Pirates' scintillating rookie center fielder last season, likely comes to mind for most when looking well ahead. He is 23 and cannot become a free agent until 2015 but, given the many recent trades of popular players partly because of cost, there surely are those who already can envision McCutchen in the pinstripes of the New York Yankees.
Coonelly encapsulated the model as follows, beginning with the shift of money from major league payroll to development, now virtually complete: Win with the youngsters, draw more fans for more revenues, then spend more to keep some of those players into their veteran years.
"Because we have taken the painful steps where we can make the long-term investments in our foundation and development system, we now have many good players in the system," Coonelly said. "Those players now need to come together and play winning Pirates baseball ... "
Part of the Pirates' model, as Coonelly said unapologetically, is staying solvent.
"We're developing a large, strong core of very good players. We won't be able to keep every player we develop, but we will work hard to retain as many as possible. How do we retain stars like Andrew? Based on the economics of the game, we need to put together a winning team that can support the salaries of a much larger payroll than we now have. If we do that, Pittsburgh will support a much larger payroll."