Pirates open books, explain payout to owners
Zach Duke pitches against the New York Mets on Sunday at PNC Park, where the Pirates ended a five-game losing streak with with their 2-1 victory.
Share with others:
The Pirates made $5.4 million in profit in 2009, owner Bob Nutting said Sunday, after two years of much greater profits and a complex distribution of $20 million to the team's ownership group two years ago.
In an afternoon meeting with four media outlets at PNC Park that Mr. Nutting and team president Frank Coonelly described as being aimed at a leak to The Associated Press of the team's 2007 and 2008 audited financial books -- published Sunday night -- Mr. Nutting gave unprecedented detail about the team's financial history since he took over as controlling owner in early 2007.
"The presumed implication that anyone in the ownership group is lining their pockets is inappropriate," Mr. Nutting said. "It's not happening."
Among the numbers Mr. Nutting and Mr. Coonelly attributed to the same audited statements that the Pirates file annually with Major League Baseball and its players' union:
• The Pirates' exact profit -- or net income -- for last season was $5,409,087. The profit for 2007 was $15,008,032, and the profit for 2008 was $14,408,249.
• No ownership dividends were paid in that time, and Mr. Nutting took no salary or management fee, but the 2008 books include the $20,443,000 distribution made to general ownership in the 2008 books. That was approved by four separate votes of the team's six-man board of directors, stretching from late 2007 to mid-2008.
The board at the time was Mr. Nutting; his father G. Ogden Nutting, publisher of the Ogden Newspapers chain; brother Bill Nutting, vice president of Ogden Newspapers; Duane Witman, Ogden's chief financial officer; Kevin McClatchy, the previous controlling owner; and Don Beaver, North Carolina businessman. Mr. McClatchy stepped down in late 2009.
Mr. Nutting and Mr. Coonelly focused most of the Sunday media session on the $20.4 million.
"That's the one that could be most easily misconstrued, and we're here to address it," Mr. Nutting said.
According to Mr. Nutting and Mr. Coonelly, slightly more than half the distribution, $10,839,000, was paid to the ownership group -- all of the ownership group, including Mr. Nutting -- to cover most of the owners' individual taxes, federal and state, on the team's profits for 2006 and 2007. Mr. Nutting and Mr. Coonelly said there would have been no way to single out any owner or owners for such payments.
No payments were made to cover the owners' taxes for 2008 or 2009, a decision made by Mr. Nutting and backed by the board. The Pittsburgh Post-Gazette reported in December that this displeased some minority owners, who were receiving no money from the Pirates -- dividends or distributions -- and had to pay the taxes out of their own incomes.
"The Pirates don't do that, as a matter of course," Mr. Coonelly said of paying taxes, though both acknowledged the subject could come up again in a future vote of the board.
The Internal Revenue Service requires corporations to pay taxes for owners, but the Pirates are a limited partnership, Coonelly said, and such payments are "not automatic."
The rest of the $20.4 million payout, $9,604,000, was the repayment of interest on a loan the Nutting family made to the Pirates in 2003.
That was the year that Mr. McClatchy told the Post-Gazette the Pirates were losing $30 million, and a higher debt level than allowed by MLB prompted the team to openly dump players' salaries, including the highly controversial trade of promising third baseman Aramis Ramirez to the Chicago Cubs.
The loan from the Nutting family, technically known as a convertible note, had a principal amount -- not disclosed -- that the family could have converted into cash but chose to convert into equity in the team. It is believed that Bob Nutting currently controls more than three-quarters of the team.
After five years, the interest due on that loan also could be converted into equity, but that would have resulted in diminished shares for the minority owners, and they balked. The vote of the ownership group -- with the Nuttings forced to recuse themselves -- was to convert the interest due for 2007 and 2008 into cash. The first payment, $4,563,000, was made Dec. 20, 2007. The second payment, $5,041,000, was made July 10, 2008.
"The total of $20.4 million in distributions made in the 2008 fiscal year looks significant simply because, as a result of the timing of board votes, two separate interest payments and two separate tax payments associated with three different years were all made in one fiscal year," Mr. Coonelly said. "Had the four distributions been made over the three years to which they related, there likely would have been little interest in these standard and appropriate distributions."
The Post-Gazette report in December estimated that the Pirates' combined profit in 2008 and 2009 was less than $11 million -- a figure that did not come directly from the team -- but that did not reflect the amount or timing of the distributions.
Mr. Nutting said that his goal has been to keep as much capital as possible inside the Pirates, and he took umbrage at the widely held public sentiment that he is profiting from the team at the expense of winning. The Pirates have the worst record in the majors at 41-83, and their 40-man roster payroll of $44 million is the lowest, too.
"I hear all that," Mr. Nutting said of the criticism. "I really believe we are doing the right things for the club. I know we're acting honorably. I know we're acting in the best interests of the Pittsburgh Baseball Club. And I know we're making good decisions that are going to help us create a winning organization. I really believe that what we're going through is worth it. Because if I didn't, there would be no reason to put up with the agony, whether that's the on-field performance this year, or the public lashing. We're going to stay the course."
On that topic, Mr. Coonelly added, "From my perspective, it's particularly frustrating because Bob has given us every asset we've asked for. This past week alone, we asked for a lot of resources to bring in what we feel are the three premier arms in amateur baseball."
That reference was to the signings of the top two draft picks, Jameson Taillon ($6.5 million) and Stetson Allie ($2.25 million), as well as Mexican amateur Luis Heredia ($2.6 million). The Taillon bonus was a franchise record for the draft, as was the Heredia bonus internationally.
When asked why the Pirates had profit levels at all, rather than spending on major-league payroll, Mr. Nutting and Mr. Coonelly cited a need to stay in the black to ward off excessive debt and cover capital expenditures.
"The club should be, needs to be, and is in strong financial shape," Mr. Nutting said. "It's important that the team not be in the kind of shape it was in 2003, when we were making bad decisions purely driven by financial constraints. We're not going to apologize for making the right moves, the right investments to take steps forward."
The Pirates did not divulge the debt, but it is believed to be more than $100 million.
"It's manageable," Mr. Coonelly said. "We're comfortable and, most important, our banks are comfortable with where we are. We need to operate the franchise in a financially sound manner. If we don't, our only recourse is to go to the banks for more money. At some point, the bank isn't going to give you money anymore."
The Pirates did provide figures on the capital expenditures over the past three years. The figure was $4.4 million for 2007, $8 million for 2008 and $7.3 million for 2009. All were financed over extended periods.
The expenditures included $5 million to build a baseball academy in the Dominican Republic, $2 million to improve the Pirate City spring and rookie training facility in Bradenton, Fla., and $2 million to purchase the new Class A Bradenton Marauders affiliate in the Florida State League.
"We need to maintain projects like this to run a first-class franchise," Mr. Coonelly said.
The Pirates' $5.4 million profit for 2009, considered modest in the world of professional sports, raises another, completely contrasting issue: Can the team compete financially?
As Mr. Nutting joked during the meeting, "Wouldn't it be ironic if we get beaten up for not making enough money?"
Several high-priced players were traded near the July deadline last year, including shortstop Jack Wilson ($7.25 million), first baseman Adam LaRoche ($7.05 million) and second baseman Freddy Sanchez ($6.1 million), and the team's total savings was $7.3 million. By year's end, their 40-man roster payroll was $47.8 million, far below the $55 million that had been projected on opening day.
Mr. Coonelly was adamant at the time that the trades were made "for baseball reasons," and he repeated that Sunday.
"We had budgeted close to breaking even," he said of 2009. "And, obviously, 2009 brought revenue challenges that everybody in the industry faced. But no, we did not feel compelled to make those trades."
At the time, LaRoche appeared to be the most obvious move made for salary purposes.
"We didn't think Adam was part of our long-term future and, as a result, were willing to get players back and move payroll off the roster. But we didn't feel compelled to do it. We thought it made sense."
Mr. Coonelly told the Post-Gazette Friday that the Pirates could make a "meaningful" increase to payroll for 2011, and he repeated that, though still without offering a number.
I've already said we have the capacity to -- I didn't say we would -- increase payroll next year and going forward. We'll be out there looking for the right players to add to the young mix we already have."
Because the Pirates have the majors' worst record, they are in line to have the No. 1 draft pick next June, and that could be expensive: The Washington Nationals had that pick the past two years, and they guaranteed $15 million to pitcher Stephen Strasburg and $9.9 million to catcher Bryce Harper.
Can the Pirates afford a No. 1 pick?
"We certainly can," Mr. Coonelly said.
Mr. Nutting and Mr. Coonelly each expressed anger about the leak, with Mr. Coonelly saying, "Someone with access to the club's financial statements has breached his or her fiduciary obligation by providing a copy of the club's audited financial statements for the 2007 and 2008 seasons to The Associated Press."
"It's not information that's appropriate to be shared for a private business, and it wasn't appropriate to be leaked," Mr. Nutting said.
Both stated that the Pirates will not issue further financial statements.
Mr. Nutting also reiterated that the team is not for sale, despite three overtures in recent years: Mario Lemieux and Ron Burkle, owners of the Penguins; Mark Cuban, owner of the NBA's Dallas Mavericks and a Mt. Lebanon native; and Chuck Greenberg, the Pittsburgh attorney who just bought MLB's Texas Rangers.
First Published August 23, 2010 12:00 am