Miscellaneous MLB Team Financial Information 2007 – 2011 Basic Agreement is 241 pages long and expires on Dec. 11, 2011. - http://mlbplayers.mlb.com/pa/pdf/cba_english.pdf
Although many of the provisions relate to the players, some provisions relate to the financial operations of the teams. One such provision relates to the level of debt that a team is allowed to incur. In my opinion, the provision contains many definitional hurdles and exceptions that allow a team to obtain unsustainable levels of debt that a typical private enterprise would never attain to unless they were approaching or trying to prevent or postpone insolvency status.
ATTACHMENT 22 - DEBT SERVICE RULE
No Club may maintain more Total Club Debt than can reasonably be supported by its EBITDA. A Club’s Total Club Debt cannot reasonably be supported by its EBITDA if Total Club Debt exceeds the product of the average of that Club’s EBITDA over the most recent two years multiplied by the Cash Flow Multiplier [10 or 15 times] applicable to that Club; provided, however, that a Club may elect, on or before April 1, 2007, to utilize, in both 2007 and 2008, the average of its EBITDA over the most recent three years.
So in other words, each year as the Dodger team borrows additional funds, they must increase their EBITDA by cutting costs, deferring payroll to future year(s), increasing revenue, and/or accelerating future revenue into the current year. Therefore, the McCourt’s’ life style during marriage could actually be the reason that the payroll is dropping not their Divorce. Therefore, Frank may well be correct when he says that the Divorce has no effect upon the Dodger 2010 team payroll.
“EBITDA” means a Club’s earnings for its fiscal year, before interest, taxes, depreciation and
amortization, as calculated and reported in accordance with Part I, Schedule I, Section D, Line 45 of the annual Financial Information Questionnaire (“FIQ”), which each Club must submit to the Office of the Commissioner after the close of each fiscal year.
So in other words, the high level of depreciation on the property and equipment; and the high level of interest payments are added back to the preliminary earnings in order to determine the Team’s income for determination of solvency for purposes of evaluation by Commissioner Selig’s office. The higher the level of depreciation and interest, the higher the possible level of angst by the commissioner’s office when they see how the letter of the rules may not have been drafted in a manner to comport with the spirit of the intended insolvency prevention rules.
“Total Club Debt” means a Club’s total outstanding debt, calculated as an average over the course of each fiscal year, including without limitation all long-term and short-term obligations and all indebtedness resulting from:
(1) funding from Major League Baseball’s industry credit facility;
(2) other third-party debt;
(3) deferred compensation (other than deferred compensation payable to Major League Players (see clause (8) below));
(4) stadium-related debt incurred for or in connection with ballpark construction or improvements; provided, however, that any debt falling within this clause (4) shall not become part of Total Club Debt until the first full season of the operation of the new or renovated stadium for which such debt was incurred;
(5) loans or advances from related parties, but only if those loans or advances are collateralized by the assets of the Club;
and (6) any other debt that is properly classified as an indebtedness of the Club under generally accepted accounting principles, but excluding
(7) the Excludable Debt and
(8) any compensation payable to Major League Players, including deferred compensation or any other commitment under a Uniform Player’s Contract, or any obligation to the Major League Baseball Players Benefit Plan or the Industry Growth Fund.
In 2007, “Excludable Debt” shall be the first thirty-six million, five hundred thousand dollars ($36,500,000) in outstanding debt from any of the sources described in clauses (1)-(6) above and shall grow in each succeeding year by the percentage growth in the industry’s total operating revenue (as defined in Part I, Schedule I, Section A, Line 12 of the FIQ) from year to year. The Cash Flow Multiplier shall be ten (10), except that any Club which incurs (or has incurred within the last ten years) stadium-related debt to finance construction of a new ballpark or the major renovation of its existing ballpark may use a Cash Flow Multiplier of fifteen (15) for the first ten (10) fiscal years after that ballpark’s opening or re-opening.
So in other words, Not All Debt is Debt! Debt that is not counted would include:
- Deferred compensation to the players,
- The proceeds from loans obtained as individuals through the collateralization of family assets that are then loaned to the team but not collateralized by team assets,
- Certain operating as opposed to capital leased (as defined by GAAP),
- $36,500,000, and
- A significant portion of the debt utilized to make major renovations.
We can only speculate regarding whether the Los Angeles Dodgers are in compliance with the above rules by a whisker or a mile, but we may well find out in August when significant financial information will most likely be available. However, when I read the above MLB rules I now understand the possible reasons that certain decisions have been made by Dodger management.
Section 4 of Attachment 22, provides for 16 remedies that may be utilized by the Commissioner’s office, for the benefit of MLB and the players, when a team is not in compliance with the terms of the Agreement. Unfortunately, one such remedy is the prohibition of a team from making any capital expenditures without the Commissioner’s approval. Is this remedy the reason that the Dodger’s postponed their most recently planned renovation? Only time will tell. Another remedy is the ability of the Commissioner to require the owner(s) to personally guarantee the Team’s debt. Is Jamie willing to do this now or is she just playing poker? Is this remedy on of the reasons that the McCourts signed a post nuptial agreement?
In summary, I have expressed my opinion several times that there is a low probability that the Dodgers will spend significant sums on player salaries until there they are able to receive the necessary economic benefits from the ownership of a cable network. I certainly hope that the Dodger’s team financial situation does not prohibit them, or their owner(s) from being able to finance the startup and operation of a Cable network.
Written by Ken, who is a CPA, MBA and an Attorney. He is LAdodgerTalk’s Staff Attorney, CPA, MBA… and “worry-wort” . I have always wondered if they are worrying about your assets, or how they can get your assets. [This is a public service announcement by Mark.]