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Sport Sections
Friday, July 21
Economists: Baseball's debts misleading



Baseball owners, reports of your debt are greatly exaggerated.

That's what some of the most respected sports economists are saying in response to the Blue Ribbon Panel's recent report on the financial state of baseball.

1995-99 Operating Profits/Losses (millions)
 1.  Yankees +64.50
 2.  Indians +45.92
 3.  Rockies +12.44
 4.  Devil Rays -4.88
 5.  Expos -5.14
 6.  Red Sox -5.43
 7.  Braves -6.88
 8.  Orioles -10.03
 9.  Pirates -18.90
 10. Cubs -30.36
 11. Diamondbacks -30.63
 12. Reds -32.53
 13. Phillies -32.71
 14. Twins -36.69
 15. Rangers -38.96
 16. Mets -40.56
 17. Mariners -41.65
 18. Brewers -42.86
 19. Tigers -44.71
 20. Athletics -44.95
 21. Cardinals -47.40
 22. White Sox -48.10
 23. Royals -56.91
 24. Marlins -63.63
 25. Astros -71.12
 26. Padres -72.07
 27. Dodgers -77.33
 28. Angels -83.32
 29. Blue Jays -87.63
 30. Giants -97.02
Totals -1,049.54
Source: Commissioner's office

"There are so many ways to legally 'jockey' the book," said Andrew Zimbalist, an economics professor at Smith College in Massachusetts and author of Baseball and Billions. "I'm even surprised that those individuals (on the panel) quoted those numbers as relevant."

The Blue Ribbon Panel, which released its report last Friday, consisted of former Federal Reserve board chairman Paul Volcker, political columnist George Will, former U.S. senator George Mitchell and Yale president Richard Levin. Although the panel was hired as an independent council to determine the latest economic state of the national pastime and make suggestions to restore competitive balance, economists say that each team's budget numbers came directly from the owners.

"Don't forget that the report was done for public relations purposes," said Roger Abrams, a law professor at Northeastern University. "It's the beginning of the tug-of-war for the public's view and the worst thing is to have an independent council and have them actually be independent."

Will, for instance, is a member of the board of directors of the Baltimore Orioles and the San Diego Padres.

According to the panel's report, Major League Baseball teams have lost over $1 billion in the five-year period from 1995-1999, with only three teams earning a profit (Cleveland, Colorado and the New York Yankees).

While economists are not shocked with the numbers put forth, they are skeptical of their accuracy.

"I think I want to see all their books," said Rodney Fort, an economics professor at Washington State University. "What outside observers figure out is directly at odds with the numbers of the owners. Sports accounting has some special elements that make it practically impossible to show book profits."

Team financial records will frequently reflect a loss, because owners have accountants that can reposition profits to show them as debt.

"Sports accounting is to accounting as military music is to music," said Abrams. "It's still accounting, but not quite."

Owners will often pay themselves consulting fees, which raises costs and lowers profits or, in the case of media-owned teams, pay less than market value for the services of their partner.

Baseball responds
Major League Baseball stands by the numbers used by the Blue Ribbon panel.

"None of the economists cited here have ever once seen a club financial statement," said Richard Levin of Major League Baseball. "(And they) apparently do not understand the process."

Levin said that each team's books are audited independently and submitted to Major League Baseball. After that, they are audited by Ernst & Young, under the direction of the MLB office in New York. After that, Levin said, the financial statements are audited by PricewaterhouseCoopers for revenue sharing purposes.

After that, the Major League Baseball Players Association can call for an audit. Levin said the MLBPA has never done that.

A perfect example is the relationship between the Cubs and its TV partner, WGN, both of which are owned by the Tribune Company.

"WGN underpays the Cubs for broadcast rights by $20 million or more," said Zimbalist. "So the Cubs revenues are much lower than they ought to be." According to the numbers listed in the report, losses of media-owned teams over the five-year span were approximately $12 million above the league average of approximately $35 million. Of the five teams owned by television interests, the Cubs, Braves and Dodgers control their local television rights.

Owners will then use the "independent" numbers as a basis for argument with the union when the Collective Bargaining Agreement -- which is likely to be extended until the end of the 2001 season -- ends.

"(The losses shown are) an attempt to make us doubt whether a team is financially robust or not," said Gerald Scully, professor of economics at the University of Texas at Dallas and author of The Business of Major League Baseball. "And if you are a monopoly, you always want to claim that you are not doing well."

Not only are the losses apparently blown out of proportion, but the number of teams that have made money over the five-year period may be far greater than the reported three.

Steinbrenner to file antitrust suit?
If the Blue Ribbon Panel's recommendations of sharing all local revenue (of between 40 and 50 percent) are brought up in discussions for the next Collective Bargaining Agreement, economics professor Andrew Zimbalist believes that George Steinbrenner will lead a revolt of higher revenue-generating teams.

"If they do vote on this, Steinbrenner and a couple others will bring an antitrust suit against baseball," predicted Zimbalist. "Steinbrenner will claim that they are expropriating his asset by diminishing it in half."

Steinbrenner has said that he should not be forced to support lower-revenue teams that do little improving and a good deal of pocket-stuffing.

Steinbrenner previously sued Major League Baseball after it tried to prevent a merchandising contract the Yankees signed with adidas. Baseball tried to prevent adidas from selling T-shirts at Yankee Stadium. Steinbrenner won the out-of-court settlement in April of 1997 that allowed the reported 10-year, $93 million deal with adidas to stand.
--Darren Rovell

Scully believes that two-thirds of the teams are making money, while Fort thinks at least the majority of the teams are profitable.

Despite the losses shown in the panel's 87-page report, economists say the continually increasing team price tags provide some of the best evidence that baseball is healthier than the report says.

"When somebody pays $100 million for a team and then unloads it for $85 million, then I will believe that the owners are having monetary difficulty," says Stephen Ross, professor of law at the University of Illinois.

Scully points to the owners of the Oakland A's, Steve Schott and Ken Hofmann, who believed that their team had appreciated by 120 percent in the three years of their ownership.

"They bought the A's for $68 million (in November 1995) ... and then they claimed it was worth $150 million when they were trying to sell it." After the initial purchase, published reports listed the sale price as $85 million, in order to make the appreciation on the next sale appear smaller. But Friday's Blue Ribbon Panel report suggests that there is little correlation between operating losses and franchise value. The report listed the A's in the top half of teams with the worst operating losses ($44.95 million) from 1995 to 1999.

Indeed, franchise values show no signs of going down despite the panel's report of great debt. Published accounts Wednesday have cable company Rogers Communications offering US$150 million to Interbrew's Labatt Breweries for the Toronto Blue Jays. The Blue Ribbon Panel report listed the team as the second-most financially unstable team, with losses of over $87 million from 1995-1999.

While the report states that "many clubs have reached dangerous levels of debt," Scully is not alarmed.

"As an economist and a fan, there is no concern to be had unless I see clubs go belly up," Scully said. "And I'm just not seeing that."

Darren Rovell covers sports business for ESPN.com.

 



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