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Are The Dodgers In Danger?

Are The Dodgers In Danger?

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

Are The Dodgers In Danger

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:

  1. Deferred compensation to the players,
  2. 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,
  3. Certain operating as opposed to capital leased (as defined by GAAP),
  4. $36,500,000, and
  5. 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.

GO DODGERS!!!

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.]

About Ken

Ken is a professional working in multiple disciplines who has participated in various sports from elementary school through post intercollegiate level. He may be the only athlete in intercollegiate sports history to have started as both a middle blocker on an intercollegiate volleyball team and as a hook on an intercollegiate rugby team during the same season. He has been a Dodger fan since youth and now regularly watches over 150 Dodger games per season.

14 Responses to “Are The Dodgers In Danger?”

  1. Badger says:

    Holy Mutatis Mutandis Batman – I think we have been invaded by courtroom aliens.

    Listen all I know is a team owner in A Court having jurisdiction in a particular case is Functus Officio therefor discharging duty A judicial or official person prevented from taking a matter further because of limitation by certain regulations of MLB clauses and proceedings issued or directed against team property as opposed to a specific person or persons – an admiralty action in rem would be issued against the team (and or person or persons) itself – in this case – Jamie and Frankie provide the courts prima facie nulla bona evidence that would be considered sufficient to prove a case unless disproved – if no prima facie evidence can be offered there is no Pro Rata case to answer.

    And that is fact!

    Look are you gonna believe what you see or what they tell you? The Dodgers are in trouble because the owner has his cheese balls tightly secured in a pair of 12″ PE 7CR Straight Jaw Vice Grips and Jamie and her team of lawyers that actually understand what Ken just wrote ain’t lettin’ go.

    We should be fine this year if the crap doesn’t spill out on the field. We actually have a decent team out there, even though most of us are still concerned about starting pitching. Mariotti’s article, yeah I know, we don’t like him, actually touched on something I have brought up several times with no reaction – we may be trading Manny at the deadline to an A.L. team that could use what he is – a DH. And you know what? that may not be such a bad move. We can get young talent that we didn’t get by not offering arbitration to Hudson and Wolf and that we won’t get with only two top 100 picks in the upcoming draft, neither of which are all that high. We made need to take a serious look at the Twins model and take steps to perfect it.

    BTW, nice work counselor. Obviously you put some work into this. How many billable hours?

    • Ken says:

      Actually, I started writing an even more boring article about player finances (which I can submit next week) but when I started looking for provisions in the Basic Agreement about the player’s benefit plans I saw the provisions regarding the team Debt Rules and, like you, also said “Holy Batman” (Actually I said something much stronger) and proceeded to change my article. I have worked for several insolvent companies, and been involved in some turnaround situations, and my opinion is that I am officially concerned about the Dodger team finances.

      I wait patiently for Lawdog’s take!

  2. Badger says:

    I just read over on the TrueBlue site that the Dodgers 40 man now has 36 on it. Are we waiting to see who the Yankees, Phillies, etc. throw out to maybe add a few?

  3. Roger Dodger says:

    Gee, but it would be nice to have an owner that is not in McCourt’s situation. Legal problems and all keep eyes focused on other issues and away from the game.

  4. chucky says:

    Lets focus on the team. The composition of our CURRENT team is great. Most sites say we make playoffs again, then all bets are off. We have a great core of players and though we haven’t signed big time FA’s so what, did we really need to. We have two of the best young starting pitchers in the league, a great young closer and (according to Yahoo sports) the top outfield in the league. Our catcher is a young two time all-star, our 1st baseman is a young up-coming stud (but does not have the normal power of a 1st baseman but has good gap power and great clutch and average hitter) we MAY have a great hitting second baseman/3rd baseman. We compliment that with vets at ss and 3rd (to balance things out) and we have/had (I hope not) the best bullpen in the league. One of our OF’s is a HOF’er and has (or had-i hope not) the talent to carry a team for a lengthly time.

    I feel good, is it perfect NO (I will not say we do not have an ace but may have two) and I feel good about our depth.

    It’s going to be a great year with the worse case (and maybe the best bet) we make it with the wild card and the best case we run away from the whole league.

    go blue, peace

  5. A Shot of Haeger says:

    Blake DeWitt officially the starting 2B and Charlie Haeger is the fifth starter.

    I just want it to be known that I and I alone is responsible for the ascension of Charlie haeger to the 5th starter position. My unwavering support and belief is the main reason he will succeed.

    And lawdog too.

  6. lawdog says:

    Holy Crap Batman!

    It definitely looks as though it’s every bit as bad as I feared! What we’ll see on the field this year is about as good as it’s probably going to get until McCourt files for Debt Reorganization iunder the protection of the Federal Bankruptcy Court!

    How long before McCourt just promotes the Albertquacky team to play our games for us?

  7. lawdog says:

    Haeger is officially the #5 man! That’s the best news I’ve heard all spring! I lift my glass of pale tombstone ice to salutre our man Haeger and our man “shot of Haeger” who also believed he was the man!

    You know, If Torre would just give Haeger the ball every 5th day he’d log 250 innings in his sleep based on what he did at AAA last year. Throwing the dancer is as hard on your arm as under handing a small bag of beans. And it doesn’t matter what level hitter you throw it against. Nobody can hit one unless you spin it or they get damn lucky.

  8. Badger says:

    I give it to you Shot of H. If he succeeds, you get an award. If he fails, we will all come looking for you because it is obviously your falut.

    Agree wholeheartedly chucky. Well except that huge MAYBE great hitting second baseman part. That won’t happen. And hopefully Furcal can return to resemble his former self. The infield defense and offense looks rather pedestrian to me, though Loney could have a real break-out year. Our team looks pretty good. I sure wish I was more confident in the starting pitching, but, this is the Dodgers and somehow they always pitch well. Maybe it’s part Dodger Stadium. And maybe lately it has been part weak NL West, but that is going to change big time this year.

    I still got the under on 95, and much depends on how well we start.

    Let’s light this candle.

    Oh, and ldog, you know where I stand, and have always stood on the McCourts.

  9. Roger Dodger says:

    Lots of things from Dodger camp today with lineup and roster — April Fools’ Day.

    The roster 25 days from now will be different.

  10. Badger says:

    Focusing on the team here…..

    good thing we have such a great outfield.

    The guys at fanhouse don’t think much of an all Dodger Fantasy team. You may, or may not, enjoy reading this:

    http://fantasybaseball.fanhouse.com/category/mlb-position-rankings/

  11. A Shot of Haeger says:

    I’m willing to take all the accolades and all the blame, if by some miracle… Charlie doesn’t succeed. lawdog says he has the best dancer he’s seen in a long time.

    He will be fantastic!!! I cannot wait to see him in Florida

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