Secrets and Lies (Part 2 of Why Revenue Sharing Is Dead)

Stark also reports that baseball teams do not share their financial data, so that teams paying into baseball’s revenue sharing system – teams like the Red Sox, Yankees, Mets, Cubs and Angels – were surprised to learn the extent of the profits being earned by the Marlins and Pirates.  According to Stark, the Marlins and Pirates are accumulating revenue sharing money to such an extent that their profits exceed those being earned by teams required to pay into the revenue sharing system.

The survival of baseball’s revenue sharing system depended on this secrecy.  The secrecy allowed major league baseball to portray teams like the Pirates and Marlins as struggling for their very existence: they were “poor” teams being crushed under the monetary weight of teams like the Yankees.  Thus revenue sharing was painted as a kind of economic justice – Bud Selig was baseball’s Robin Hood, taking from the rich and giving to the poor.  But with the veil of secrecy removed, the system appears to take money from rich people, and give it to other rich people.  This is not Robin Hood: the kindest name for this sort of system is profit sharing.

In any event, much of the secrecy surrounding this system is now gone.  With its cloak of secrecy removed, the revenue sharing system will lose much of its support.  Fans of so-called “poor” teams are not going to vocally support a system that allows team ownership to pocket the bulk of the shared revenue.  Fans of rich teams will not like having a piece of their ticket prices diverted to support the lifestyles of Jeffrey Loria (Marlins owner) and Robert Nutting (Pirates owner).  And of course, the Hank Steinbrenners of the world were never fans of revenue sharing in the first place.

While major league baseball is unhappy about the leak of information to deadspin.com, the rest of us owe a debt of thanks to the leaker.  The secrecy surrounding baseball’s revenue sharing system is a big reason why the system was a failure, and no system is going to improve baseball’s competitive balance if the system is surrounded in secrecy.

Let’s look at revenue sharing from a business perspective.  Revenue sharing is a kind of investment.  Like any investor, baseball should seek a return on its investment – in this case, the sought-after “return” is for teams like the Pirates and Marlins to become better baseball teams.  But no investor would do what baseball has done, which is to pay out millions of dollars and merely hope for a return.  No.  An investor would insist on seeing in advance a plan for how the investment money would be used.  An investor would insist on periodic reporting (audited independently) verifying that the investment money was being used in accordance with the plan, and that the plan was working as designed.  An investor would insist on having recourse in the event that the money was not used in accordance with the plan, or if the plan turned out to be a failure.

In short: real world investors insist on accountability. Accountability requires transparency, the reporting and sharing of accurate information.  But there is almost no accountability, almost no transparency, built into baseball’s system of revenue sharing,

We said “almost”.  As we’ve discussed previously, baseball’s collective bargaining agreement requires each team receiving revenue sharing to “report on the performance-related uses to which it put its revenue sharing receipts in the preceding Revenue Sharing Year“. Moreover, the collective bargaining agreement allows the players’ union (the Major League Baseball Players Association, or MLBPA) to view these reports, and to file a grievance if a team is not living up to its revenue-sharing obligations.  So this is good news: there’s a little bit of accountability provided for by these requirements.

Or maybe not.  These “performance reports” are also kept secret by major league baseball – not even deadspin.com has been able to get hold of these reports.  True, the MLBPA can see these reports, but they’re not allowed to disclose their contents.  Moreover, the MLBPA has never filed a formal grievance over any team’s use of its revenue sharing money.  The MLBPA has intervened in the revenue sharing system only once, acting informally this year to cause the Marlins to agree to spend unspecified additional amounts on payroll.  Reportedly, the Marlins complied with this agreement by signing pitcher Josh Johnson to a contract worth $3.75 million a year.

(An aside: Josh Johnson is 11-5 for this year’s Marlins, with a team-leading 166 strikeouts and 2.36 ERA.  He’s on the short list of NL Cy Young candidates.  I don’t know what we learn from this, except that it’s not always a bad thing to force teams to add to their payroll.)

So let’s recap: the Marlins have collected $92 million in revenue sharing over the past two years, reportedly earned the highest profits in baseball over this time, and satisfied the concerns raised by the MLBPA by adding a $3.75 million pitcher to the roster.  Moreover, this is the one and only case where a team was forced to change its act under the revenue sharing system.

We can safely conclude from this that baseball’s revenue sharing system contains no effective accountability.  On the surface, this is hard to understand.  Baseball’s team owners are rich men who know how to make investments, and how to be accountable to investors.  So why would these men put up with a revenue sharing system that lacks transparency and accountability?  The answer is that the desire for secrecy has trumped all other concerns.  Baseball owners want to keep their finances a secret, even from each other.

Some of you might be wondering: how could sophisticated baseball insiders have been surprised by the data leaked by deadspin.com?  Didn’t baseball’s owners read in the annual Business of Baseball report published by Forbes that the Marlins have the biggest profits in baseball?  Not that the owners read this site, but didn’t we estimate here that 2009 revenue sharing payments to the Marlins were well in excess of $40 million?

Here’s our opportunity to shift the discussion from baseball’s secrets to baseball’s lies.  Yes, sites like Forbes.com and bizofbaseball.com have reported for years that the Marlins were highly profitable and receiving $40+ million in annual revenue sharing.  But major league baseball told us not to believe these reports.  They told us so in the strongest possible terms.

They were lying.

Let’s revisit some of these lies:

In 2002, Bud Selig told Congress that baseball was in terrible financial shape, and had $232 million in losses in 2001.  When confronted with Forbes’ estimate that baseball had earned $75 million that year and was in strong financial shape, Selig said the following: “There is no way. Those numbers are fiction, they are pure fiction.”It’s so disappointingly wrong, and they knew it. I think it’s a very sad day for journalism in America when somebody knowingly writes something that is not only not true but has been told it is not true.”   Of course, the liar here is Selig, not Forbes.  Selig’s statements were so over the top, they made ESPN’s honorable mention list of the biggest lies in sports history.

Baseball has consistently attacked the “Business of Baseball” numbers reported by Forbes.  In 2005, Rays spokesman Rick Vaughn said that “it’s recognized throughout baseball that [the Forbes] numbers are not accurate”, and MLB spokesman Rich Levin stated that “the accuracy has never been there [in the Forbes list]”.  In 2006, MLB executive vice president Rob Manfred stated that Forbes “makes these numbers up” and that the Forbes numbers “materially misstate the financial performance of the industry as a whole and of the individual clubs.”    And as late as 2007, the Marlins were denying Forbes’ reports that the Marlins were making a profit.

OK.  The deadspin.com documents contain data for 2007-09, so we can’t use them directly to verify numbers published in Forbes prior to 2008.  But it’s safe to assume that today’s Forbes numbers are about as accurate as they were three years ago, or five years ago, or 10 years ago.  Forbes has not changed its methodology.  The numbers from year to year are consistent.

The deadspin.com data makes it clear: Forbes does a pretty good job of estimating the financial performance of major league baseball.  This is the conclusion of the experts who have compared the deadspin.com numbers to those reported by Forbes.  We can compare a few of these numbers ourselves, to verify that Forbes is more or less getting it right.  Let’s start with the Marlins (all numbers shown below are in millions of dollars):

Forbes Deadspin
2008
Revenue $139 $139
Operating Income $43.7 $39.2
Gate Receipts $22 $21
2009
Revenue $144 $135
Operating Income $46.1 $12.7
Gate Receipts $26 $22

Do the Marlins have had cause to complain about the differences between the Forbes numbers and the leaked numbers for 2009?  Probably not.  True, there’s a big gap between the 2009 operating income numbers shown in Forbes and deadspin.  However, CPA Jorge Costales has blogged that the gap can be explained by differences in the way the accounting was performed for each set of numbers.  More specifically, Costales contends that the Marlins miscategorized certain expenses (including $10 million that the Marlins paid as “Ownership Payments” and another $3 million paid as a Management Fee to a “Related Party”) as being deductible from income, and that the Marlins really made more money in 2009 than they reported.

In any event, I’m not aware of any complaint by the Marlins over Forbes’ 2009 numbers.  Instead, the Marlins complained about Forbes’ 2008 numbers (which as we’ve shown are pretty damn accurate).  After Forbes released its 2008 numbers, Marlins president David Samson said “every year I continue to be surprised at the absolute inaccuracy that a so-called reputable magazine is willing to print.”   Samson also assured Marlins fans that if the Marlins were earning a profit, then Marlins owner Jeffrey Loria “would want any dollar extra going into payroll.”

I think we can safely add David Samson to the list of baseball’s most outrageous liars.

Next, let’s compare the Forbes and deadspin numbers for the Rays:

Forbes Deadspin
2007
Revenue $138 $134
Operating Income $29.7 $21.7
Gate Receipts $24 $28
2008
Revenue $160 $161
Operating Income $29.4 $14.2
Gate Receipts $40 $39

Again, Forbes is good at estimating revenue, but this time they seem to be way off on operating income.  Why the gap?  Well, perhaps we’re dealing with another difference in accounting methods, like the one pointed out by CPA Costales for the Marlins.  Or perhaps the Rays have reason to dispute these operating income numbers.  But these aren’t the numbers that the Rays have disputed.  Instead, in early 2008 Rays president Matt Sliverman declared that the Rays were “cash-flow negative”.  Unfortunately for Mr. Silverman, the deadspin.com documents now reveal that the Rays were slightly cash-flow positive in 2007, and $32 million worth of cash-flow positive in 2008.  The Rays prove not only that baseball lies, but that baseball is not particularly good at lying.

(In fairness, we should point out that Silverman did eventually admit that the Rays were cash-flow positive in 2008. We won’t group Silverman with the Seligs and Samsons of the world. The Rays are actually trying to use revenue sharing in the right way, as Maury Brown has written in Biz of Baseball. Too bad that the Rays are currently receiving less support from revenue sharing than ever before, now that they most need revenue sharing to consolidate the progress they’ve made on the field. As we’ve pointed out, the system is designed to generously support baseball’s worst failures, and now that the Rays are succeeding … well, you probably get my drift.)

We may have an opportunity at a later point to compare the Forbes and deadspin numbers for the Pirates, Mariners, Angels and Rangers.  I’ve already done so privately.  Sometimes, there are gaps between the Forbes and deadspin numbers.  The gaps are probably caused in some cases by different accounting practices used by different teams, and in some cases by problems with the information used by Forbes.  We need to remember, baseball’s financial data is kept secret from almost everyone, including the editors of Forbes, so the Forbes numbers can only be highly intelligent guesses.  However, it’s apparent to everyone that the Forbes data is much more reliable than the information we receive from the likes of Bud Selig.

Forbes is trying to tell us the truth.  MLB is trying to mislead us.  Here’s how Ray Ratto summed up the lesson taught by the leaked deadspin.com financial statements: “We learned that without question and in all cases, owners lie about their profitability in the same way that mammals breathe — regularly, rhythmically and instinctively.”

You may have asked me before: why am I so convinced that baseball’s revenue sharing system will be replaced, overhauled or simply abandoned?  Try thinking of the system as a three-legged stool.  One leg supporting the system is the legitimate need to help small market teams compete with big market teams – but this leg was wobbly, as the system has been abused by small market teams less interested in competing and more interested in jobbing the system to boost team profits.  Unfortunately, the two other legs supporting the system are secrecy and lies.

With the deadspin.com disclosures, the secrets have been revealed and the lies have been exposed.  Baseball’s system of revenue sharing no longer has a leg on which to stand.

Baseball fans deserve something better.

(An aside: our revenue sharing estimates here at IIATMS proved eerily accurate in some cases, and WAY off in other cases.  Our 2009 revenue sharing estimate for the Marlins differed from the actual number by less than $1 million.  That’s pretty close to on the nose.  We still do not know how much the Pirates received in revenue sharing in 2009, but their 2008 revenue sharing payment was about $39 million, which is only $3 million less than what we guessed for the Pirates for 2009.  By the way, Forbes guessed that the Pirates’ piece of 2009 revenue sharing was “more than $35 million”, so our guess for the Pirates was about as good as that of Forbes. We don’t have 2009 numbers for the Rays, but the Rays received $35 million in revenue sharing in 2008, which is pretty close to our $33 million estimate for the Rays in 2009, especially given that the Rays’ revenue sharing payments appear to be declining over time. We didn’t do as well for the Angels – we underestimated their payments by about $3 million.  We’ll take a pass on the Rangers, given their financial turmoil and the fact that they received $18 million less in revenue sharing in 2009 than they had in 2008.  That target was moving a little bit too quickly to expect us to take an accurate shot. As for the Mariners … we don’t have their 2009 numbers, but since I guessed that the Mariners received a modest amount of revenue sharing in 2009 and since the Mariners actually paid a decent amount of revenue sharing in 2008  … well, the less said about our Mariners’ estimate, the better.)

3 thoughts on “Secrets and Lies (Part 2 of Why Revenue Sharing Is Dead)

  1. Elliot

    Transparency is indeed the key; I am a corporate officer in a major bank, so I can attest to how things change once shrouds are lifted.  I can also speak to how many people’s lives can be negatively affected by a lack of transparency; in effect, it changes everything.  In baseball that means jobs, ticket prices,…

    I am convinced that the only way to truly “fix” baseball is to leverage the threat of antitrust exceptions being lifted.

    Nice job, Larry!

  2. Hantu13

    Larry,
     
    Good sereis, and I believe you’re right, this is going to unravel as well…  The system was poorly thought out from the beginning, but it’s amazing to think that the Yankees, Sox, Angels, etc. have been writing checks without very clear visibility into where that money goes.
     
    I agree with Rob Neyer that it’s probably counterproductive to force teams to spend money- all it will do is raise the salary of mediocre, veteran free agents… But, as you pointed out, there are better solutions and tying payments to market size is clearly the best one.
     
    The other thing to keep in mind is that the players are receiving a smaller percentage of league revenues than the other major sports leagues.  They are just as complicit in this chicanery as the owners, but I wonder how things look from their perspective now.  The players who have benefited the most over the past few years have been youngsters from the minors- none of whom are members of MLBPA.  It’s really been tough to be a league average veteran recently.
     
    Would they be better off agreeing to a harder cap in exchange for an agreed upon percentage of league revenues? One of the requirements surely would be transparent (at least within the league), audited financial statements… I philosophically disagree with a cap, but from the perspective of the players union, I wonder how it looks…
     
    Keep up the great work.

  3. Larry@IIATMS

    Elliott, thanks!  We’ll continue to talk here about “fixes” for baseball.
     
    Hantu, thanks!  We talked here over a 4-part series about the percentage of revenues being received by the players, and hardening the salary cap.  For the moment at least, there’s no interest among the owners or the players in salary caps, and the union has expressed opposition to salary floors.  According to Maury Brown at Biz of Baseball, the union and the MLB brass ARE willing to discuss something called “salary compression”, which I think means the narrowing of the payroll gap between the Yankees and the Pirates.  How to achieve this compression without caps and floors?  I dunno.  I think that the MLB would consider raising the “luxury tax” rate and lowering its threshold so that it applies to teams other than the Yankees.  But that sounds like “compression” applied solely to the top half of the compression equation.
     
    At the moment, the best ideas for addressing competitive balance are coming out of the blogosphere.  I’ll try to get to some of them soon.

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