Pirates owner Bob Nutting gets a firsthand look at the team early in camp last spring. Said Nutting: "We knew it was up to us to put an exciting team on the field that could consistently compete for the postseason. ... The results have been additional revenues, all of which we have invested back into the club."
By Bill Brink / Pittsburgh Post-Gazette
Consider how much it cost the Pirates to negotiate with Jung Ho Kang. They bid $5 million just for the right to talk to the 27-year-old infielder, $5 million in addition to what they will pay Kang this season.
That's not much in terms of today's baseball dollars, and neither is the $11 million he is guaranteed on his four-year contract. But think about that in the context of where the Pirates' payroll has been: $5 million would have represented about 11 percent of the team's $44.1 million end-of-year payroll in 2010.
Kang's contract pushed the Pirates' projected 2015 opening-day payroll above $90 million, an unprecedented figure for the organization. That increase is attributed to, among other things, record attendance coupled with increased ticket prices, massive new national TV contracts and the increase in income from revenue sharing. They have set records for payroll in each of the past four seasons.
"It's a reflection of the fact that the organization's growing and the organization is reinvesting its resources back into the club," team president Frank Coonelly said.
But compared to the rest of the league, the Pirates are still running in place. They ranked 27th out of 30 in end-of-year payroll in 2014. The same central fund revenue that aided the Pirates has helped other teams, as well, and massive local television rights deals have inflated roster spending league-wide. This year, the Pirates will have doubled their payroll in a six-year span and could still rank in the bottom third of MLB.
Considering their payroll went from $44.1 million in 2010 to $51.8 million in 2011, $61.3 million in 2012, $74.6 million in 2013 and $78.4 million last year, where is the additional $12 million-plus coming from?
The 2,442,564 fans who attended games last year set a PNC Park record, breaking the mark from the stadium's first season in 2001. After keeping ticket prices static since 2002, the Pirates began raising prices in 2012.
"We knew it was up to us to put an exciting team on the field that could consistently compete for the postseason," Pirates chairman and principal owner Bob Nutting said last week by email. "Now that it has happened, our fan base has been reenergized. The results have been additional revenues, all of which we have invested back into the club."
As more and more teams signed massive television rights deals, the money distributed from revenue sharing has increased. Each team contributes 34 percent of its net local revenue - everything it makes from ticket sales, local television contracts, etc. - into a pool, the first step in a complicated process that also involves a supplemental plan and partial revenue-sharing disqualification based on market size.
To divvy this up, the collective bargaining agreement, negotiated between MLB and the Major League Baseball Players Association, refers to Attachment 26, which contains three charts: Revenue Sharing Performance Factor, Market Rank and Revenue Sharing Disqualification. The performance factor chart assigns each team a percentage, either positive (for bigger-market teams) or negative (for smaller-market teams). Clubs with positive performance factors pay into the plan, while clubs with negative performance factors receive money.
The CBA's market rank orders the teams from large market to small - the Pirates are tied for 28th out of 30 with the Cincinnati Reds. The CBA does not detail how the rankings were determined, but according to a source, the market rank took into account household income, population and the size of the team's television market. MLB and the MLBPA negotiated the performance factor percentages based on, among other things, the historical and projected financial performance of each team, a source said.
PG graphic: The payoff (Click image for larger version)
Then there is the money that everybody gets, from MLB's central fund. The new TV contracts with ESPN, Fox and TBS total $12.4 billion during the eight-year life of the deals, an average of about $25 million per team, per year, more than the previous contracts.
"Like all other revenue streams, as those sources have grown, so has our ability to invest into the club," Nutting said.
But the teams don't receive a yearly $25 million lump sum, as some assumed when the deals were signed in 2012. The contracts escalate, so the first few years of the new deals, which include the lowest yearly sums, are not that much more than those of the final year of the old deals.
"That's been a part of, at least for us, our ability to invest more in the team," Coonelly said. "Any time that the league can generate central revenue, that's good for teams like the Pittsburgh Pirates because central revenue is shared [evenly]."
Coonelly said the Pirates' income from their contract with Root Sports has increased, further helping the team spend. The Pittsburgh Post-Gazette and other outlets have previously reported that the deal provides the Pirates with between $18 million and $20 million per year. Coonelly has said the contract is worth more. The Pirates' financial documents that were leaked to the Associated Press and the website Deadspin in 2010 show the team received $16.4 million from Root Sports in 2007 and $18.7 million in 2008.
Coonelly said he could not reveal details of the contract, but that "Our contract, our local TV contract, is very competitive in the industry and puts us in a very good position to compete."
Remember the Market Rank from the labor agreement? By the time the agreement expires, after the 2016 season, the 15 teams in the largest markets will no longer receive income from revenue sharing. Among the bottom 15, the Pirates' 77.5 percent increase in payroll from 2010 to 2014 ranks second behind only the San Diego Padres, who recently signed a large new TV contract. The net increase from 2010 to 2014 - $30.4 million - ranks sixth out of the 15 teams who will continue to receive revenue sharing.
"If we don't win on the field, it's my fault, not because we didn't generate enough resources, but because we don't utilize those resources appropriately," Coonelly said.
Though $90 million-plus represents a club record for the Pirates, it does not come close to large-market teams like the New York Yankees, Los Angeles Dodgers or Boston Red Sox, who each year flirt with - or exceed - the $189 million luxury tax threshold. Those teams benefit from TV rights deals worth billions, like the Dodgers, or owning a share of the regional sports network, like the Yankees and Red Sox.
Spending isn't limited to those at the top. The Pirates' Market Rank partners, the Cincinnati Reds, spent $115 million or more each of the past two years. The Milwaukee Brewers, last in Market Rank, have been above $90 million for six years in a row, and the St. Louis Cardinals, who rank 26th, spent $100 million or more in five of the past six years. In addition to local TV deals, other factors such as ticket sales, concessions and parking revenue (the Pirates don't get a share of local parking revenue) dictate a club's spending circumstances.
PG graphic: Payroll compensation (Click image for larger version)
"As I've told our staff here, there's only one category that we will not lead the league in, and that's payroll," Coonelly said. "There's no reason why we can't lead the league in every other category, and that includes winning percentage at the end of the year."
The Pirates have navigated the financial disparity well in recent years, winning 94 games in 2013 and 88 games in 2014 while making the playoffs in both seasons.
But, like all teams, the Pirates must finance a host of other endeavors aside from the 40-man roster. Payroll represents roughly 50 percent of a team's expenditures, a benchmark Coonelly said has existed for several years. Running a farm system cost an average of $15 million in 2009, executive vice president of labor relations Rob Manfred - now baseball's commissioner - told ESPN at the time. Manfred pegged the average cost of the amateur draft and international signing bonuses at $9 million that year.
Stadium lease payments, marketing, capital improvements - like the $6.5 million spent on a new clubhouse at McKechnie Field, the Pirates' spring training stadium, and a new workout facility at Pirate City - and dozens of other expenses comprise the other 50 percent.
Increased income led to increased payroll, but that is also the case for other teams. Revenue is only increasing.
"I think our foray into the South Korean market this offseason is an example that we can't sit still," Coonelly said. "We've got to continue to look to see where the next horizon is and be first on the next horizon if it's feasible for us."
Hence, the $5 million bid to negotiate with Kang. It was $5,002,015, to be exact, an idea passed to Coonelly from general manager Neal Huntington.
"Two thousand fifteen we hope to be a very special year for the Pittsburgh Pirates," Coonelly said. "I think there was some thought to putting 2015 at the end of that bidding."
Bill Brink: email@example.com and Twitter @BrinkPG.
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