Friday, April 11, 2008

Could the Marlins even afford Cabrera and answers to other questions

A couple of weeks ago I posted about an on-air debate I had with talk radio host Jorge Sedano about the Marlins. The argument boiled down to what the intentions of the owner Jeffrey Loria are. Because talk radio isn't really a medium conducive to a rational discussion of complex issues, it really went nowhere. My premise then (and today) is that only Jeffrey Loria knows whether his intentions are to:

1. Squeeze every dollar of profit out of the team without regard to the team he is fielding or the fans

2. Work the system as it currently exists in order to win in cycles

3. Take profits now to save for the down payment that will be due for the new stadium.

I believe (and it's only belief because none of us can read minds) that it's a combination of number 2 and number 3 above. But let's look at the objective evidence and see if my theory is plausible.

1. It is no secret that Jeffrey Loria had to borrow $38 million from Major League Baseball in order to buy the franchise. Translation: Jeffrey Loria does not have the deep pockets that other owners do.

2. In 2003, the Marlins signed Ivan "Pudge" Rodriguez to a 1-year, $10 million contract. The money was paid over three years. This is further evidence that Loria didn't have sacks of cash lying around but also that he wanted to improve the team. That decision was fortuitous as we all know.

3. After winning the world series in 2003, Loria tried to keep the team together and payroll increased. When it became obvious that that incarnation of the Marlins wasn't going to compete the team cleaned house again.

4. Larry Beinfest is one of the most respected executives in baseball. He was recently given a promotion. I don't think a person with the qualifications of Beinfest would stick around if he didn't understand and believe in the long-term plan of the ownership.

In America today it's par for the course to believe that we are being had, that everyone is out to get us. Our first reaction is disbelief when someone explains to us why an action we don't agree with was necessary. This state of affairs is exacerbated in the case of the Marlins because none of the owners to date has been particularly good in the arena of public relations.

Let's analyze what the team has told us and see if it's possible that Loria is actually being honest when he discusses the financial realities of the club.

The current ownership, like the previous owner says that a new stadium is necessary to boost club revenue. Most people do understand that the team has an unfavorable lease in the current facility, without access to revenue streams that would normally be theirs. Also most people accept the fact that the location is not ideal (equally far from both south Florida population centers instead of close to one of them) for baseball. And it's reasonable to believe that weather keeps people away (whether it's heat, rain, or the threat of rain). Lastly everyone agrees that many of the sight lines in the current stadium are not good. All of which drives attendance and revenues down.

Given the lack of capital as articulated above, the team can not build a stadium with private funds. It has been a long hard road to secure public funding to cover most of the project. Still the Marlins will have to make a down-payment, cover cost overruns and pay rent in the new ballpark. The total team contribution will exceed $150 million, excluding any possible cost overruns.

Is it unreasonable to think that Loria is simply trying to save money for his stadium responsibility while building the team for what could potentially be Marlins World Series Champs 3.o?

Let me put this another way. If I were omnipotent and could offer you as a fan these two alternatives which would you take?

A. Win a World Championship and keep the team together for 5 years with diminishing chances to win another one each year

or

B. Win a World Championship and dismantle the team immediately with the idea that in 5 years it would be competitive again with the likelihood of winning increasing toward the tail end.

The old paradigm in sports was scenario A. But free agency and escalating salaries make scenario A unrealistic for all but a handful of major league franchises.

Fellow blogger and accountant Jorge Costales CPA has put together a P&L statement for the Marlins from data that has been published in various media.

According the data, the club lost $12 million in the World Series year of 2003, earned $3 million in 2004, and lost $12 million in 2005. That's a net loss of $21 million over the 3-year time span that the core of the World Series team was together. It's no wonder that Loria blew it up after 2005 and decided to lowball payroll for a while.

How was Loria supposed to pay back Major League Baseball, put money in the bank for the new stadium and increase payroll when the franchise was hemorrhaging cash?

So now we get to 2006 and 2007 where the team earned $43 and $36 million dollars respectively. It's easy to look out on the field and say we've been had but if you consider the earnings and losses of the club during the 6-year period Loria has owned the club you'll see that the team has taken in $44 million during that span. That's an average of $7.33 million per year. But that's an average. If we are going to condemn the owner for making money in 3 of the last 6 seasons then we should also commend him for losing money during the other 3 (This is the only business I can think of where it's commendable to lose money).

If the next six years resemble the last 6, then the answer to question of whether the Marlins could afford Cabrera is obviously no. Cabrera commanded a 7-year/$150 million contract. This is also a good time to point out that paying Cabrera $20 million (roughly the same as the rest of the team combined) would have been foolish. Imagine having half of your team on the DL with a torn hamstring or a pulled groin.

I want to believe that Loria wishes he had the money to sign Cabrera to that kind of deal but realized that it made no sense given all of the above. It's like buying a Cadillac when you live in a house with a dirt floor.

The fundamental problem is one of perspective. Fans want to win and they want to win all the time. They have no patience. The owner has to look at a longer time horizon. Even if he really wants to win desperately he doesn't want to take actions that jeopardize the long term health of the club.

Again, I'm no mind reader. Loria might be an evil man trying to get over on all of us, but I think the objective evidence is on his side right now. If the club gets the stadium and we continue to see the a poor man's roster then we will legitimately have a beef. But we can't expect Loria to act like he already has the stadium he's saving for and the revenue streams that it will generate when doesn't have them yet.

By the way, the team with lowest payroll in baseball is in first place by one and a half games. I fully expect that if the team continues in its winning ways that Loria will break out the check-book and get some pieces to help the club like he did in 2003. That is a much more rational use of the money has banked in the last couple of years.

5 comments:

Sully said...

I sang your praises on my blog
http://sullybaseball.blogspot.com

Jorge Costales, CPA said...

Henry - I'd like to respond in order:

1- I think it's a fair thing to deduce re the MLB loan

2- I think the Pudge deal was more about getting a limited bargain for a player coming off injuries

3- true - Forbes confirms that they had player costs of $91 in 2005

4- I think Beinfest has one of the best GM jobs in baseball - how many other GM's get to make so many big decisions re personnel? - I think he would stay irrespective of what he thinks of ownership, as long as they let him do his thing

It is not unreasonable to think that Loria is 'saving' money to pay for the marlins share of the stadium construction costs.

It is however not what teams are supposed to do with their revenue sharing monies - they are supposed to spend it improving their "on-field" performance.

Re your analysis about resigning Cabrera - I think that using the average operating income is a problem because you can't assume that certain revenues and expenses will repeat themselves.

For example you could project their operating expenses going forward, but you know that the marlins will not have player costs of $91 million as they did in 2005.

So your average operating income would double by just adjusting for that one year which was an aberration.

Henry Louis Gomez said...

Jorge,

Thanks for the comments.

As far as what the franchise is supposed to use the revenue sharing money for I suppose that's true. But MLB is not supposed to loan money to an owner either (I assume it's the first time they did it). MLB is also not supposed to operate a franchise, which they also did. My point is that the MLB office has made clear that the Marlins are a special case and that obtaining a ballpark for the club is among the highest priorities for the organization. And I can understand why. First of all, MLB and all of the owners made a tidy sum of money when they sold the Expos (Loria's former team). I suppose they "owe" him on that since, he could have moved the franchise himself and been the one to reap the benefit.

I take your point on projecting revenue moving forward. But even if the Marlins could technically afford to sign Cabrera for $20 million a year, does it make sense from a baseball standpoint, knowing that 30%-50% of your payroll is invested in one player? How many incremental wins does Cabrera give you for the money? These are the kinds of questions that I think we're finding out Bienfest has the answers to more often than not.

The problem is that the vast majority of casual fans (i.e. the people who listen to sports radio but don't really analyze things) have never read moneyball and have no clue about the differences between Baseball and other sports from a financial standpoint.

In a perfect world it would be nice to develop a player and be able to keep him. But even in Football and Basketball that doesn't happen. They only difference is that teams in those sports have a salary cap that they can use an excuse. The Marlins in effect do have a cap. And that's determined by the amount of revenue they have. Certainly the Marlins have "been under the cap" for the last two seasons, but that doesn't necessarily mean that Loria is lining his pockets with the money. First of all, like any business owner he is entitled to make a profit. The question is what's reasonable? If you look at the last two season's one might conclude that Loria is making unreasonable amount of profits but that's unfair because he lost money 3 out of the previous 4 years. So at some point, he should be allowed to recover his losses without being a punching bag.

As I said, I can't tell what's in Loria's head or heart. But judging from what I've seen I think he wants to beat the other owners on the field and in the front office (by fielding the most efficient team in the Majors).

Jorge Costales, CPA said...

Henry
First I’ll focus on what we agree – to the question about being able to afford Cabrera – yes, but no thanks, we have a better plan [development vs. free agents] is a legitimate answer. My main point is that the answer can’t be no.
Good point about MLB owing Loria re the Expos – I think the ‘debt’ they felt is a more reasonable explanation for the interest free loan as opposed to assuming he lacked the capital
Not sure what you mean when you say that Loria is not “lining his pockets” – I’m assuming you accept the Forbes figures – so that leaves us with what’s a reasonable profit for the Marlins to make – but MLB has the answer – make as much as you can, as long as the profit does not come as a result of the Revenue Sharing [RS] monies – in effect, when you receive RS you should come close to breaking even since otherwise it would be unfair to the RS payer clubs – they pay those monies to address revenue imbalance in being able to afford players, not to watch other teams pocket the money
So teams receiving RS dollars have a floor not a cap – the floor is a payroll the team can afford plus the monies received – the Marlins have been way under that floor the past 2 seasons – it does not involve looking into anyone’s heart to note that they have ignored that floor to the detriment of the product we see on the field, MLB’s revenue sharing system and to their benefit – all the while seeking public monies for a facility which will increase their future revenues and the value of their franchise.
If you can’t call that lining their pockets, then what is?

Jorge

Henry Louis Gomez said...

Jorge,

By "lining his pockets" I meant his personal pockets. If we accept the Forbes numbers to be correct or close (I do) then we know a profit is being generated. What we don't know is what that money is going to go towards. If he's making money it's part of a bigger plan to ensure the long-term health of the franchise, then what's wrong with that?

My point is that MLB may be willing to accept that the Marlins use their revenue sharing proceeds toward their portion of the stadium as a sort of special circumstance. As I've mentioned, the MLB front office has been willing to bend rules and traditions with regards to this owner and club in the past. I think Loria is getting a pass until the stadium deal is finalized because MLB has a vested interest in baseball succeeding in South Florida. Simply put, there is no bigger market than Miami-Ft. Lauderdale that doesn't already have baseball.

Presumably, when the Marlins have the new ballpark they will have more revenue and their status as a "welfare recipient" may change. My hope would be that the someday soon the Marlins are one of the clubs that has to pay into the revenue sharing scheme rather than getting paid. That would be a sign that baseball is succeeding.

Also I keep getting back to the idea of time horizons. Yes RS money should go to salaries. Does that mean the Marlins have to spend it all on day one of the season? Can they acquire players during the season? Can they use that money to sign a player next season? I would argue in favor of flexibility. Forcing teams to spend the money at the onset will only lead to further inflation of player salaries which is why the Marlins receive RS money in the first place.