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What Did The Phillies Spend More Than 156 Million Dollars On?

Posted by R.C. Cowie, Fri, June 03, 2011 12:05 PM | Comments: 11
Analysis, Opinion, Posts, Raising Questions

Prior to the ratification of the 2006 Collective Bargaining Agreement, all major league teams had to abide by the 60/40 rule; that is, 60 percent of the teams assets couldn’t eclipse more than 40 percent of its liabilities (team debt). The new CBA signed in 2006 changed that rule from the previous 60/40 provision to debt being capped based on club earnings before interest, taxes, etc.

The rule stated verbatim:

DEBT SERVICE RULE
Section 1. The 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 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.

What does this mean? Let’s use Forbes franchise estimations for the Phils team value to determine what their debt cap is. Remember, all of these numbers are estimates by Forbes. But, for this purpose I think they will give us the closest actually to what the team is up too.

Figuring Out Operating Cost Over the Last Two Seasons

Let’s average the Phillies operating costs from 2010 and 2009 and multiply by 10. We would get the Phillies debt ceiling for this year.

$14.5 (mil) (2010) + $16.3 (mil) (2009) = 30.8 million

2009-2010 values X 10 = $308 (mil).

The Phillies have an operating cost of $308 (mil) for the 2011 season.

Applying Team Debt and League Exemptions

The team carried over an applicable debt of 35 percent of its value into the 2011 season.The esitmated value of the club by Forbes is 537 million dollars.

$537 (mil) X 35% = $187.95 (mil)

Every MLB club gets a $36.5 (mil).

$187.95 (mil) – $36.5 (mil) tax exemption = $151.45 (mil)

The Phillies have $151.45 (mil) in debt.

Factoring It All In

$308 (mil) operating costs – $151.45 (mil) in debt = $156.56 (mil) under their debt cap.

Conclusion

Using all available data the Phillies are under the debt cap by 156.56 million dollars. Like most businesses, it is naive to believe the team doesn’t also have unreported income via borrowing from banks, lenders, etc. Despite that, the charges are the Phillies not only have spent $156 million, but they have also exceeded that amount by an unknown quantity.

MLB listed the following things that can be considered team debt:

Anything borrowed that is to be paid at a later date. This includes loans from other teams, partially or wholly owned regional sports networks (CSN, for example), third parties such as banks, non-player deferred compensation, stadium debt, and all debts except for player compensation and the $36.5 million tax deduction from the league.

The consequences that could be brought down on the Phillies range from limits to future borrowing, fines or limits on future player contracts.

I am particularly concerned about what the Phillies are – a) borrowing against and b) what are the buying? As we’ve seen with the Dodgers and Rangers recently, borrowing against the team to cover economic shortfalls is the beginning of the end for ownership. It’s most certainly a panic measure up there with duck and cover and pouring salt water on critical nuclear reactors.

There is no reason to believe the Phillies are McCourting the team. I can’t help but feel there has been dishonesty and recklessness in their spending if its true that they borrowed and spent at least 33 percent of the teams’ worth. It is even worse if they did so without regard to breaking the league’s rules.

The Phillies need to come clean about these accusations. Not only to reclaim the high merits of their business practices but also to regain the good will of the fan base.

Avatar of R.C. Cowie

About R.C. Cowie

R.C. Cowie has written 50 articles on Phillies Nation.

 
 
  • Posts: 206 The Dipsy

    Avatar of The Dipsy

    Wow. I had no idea that this was going on right under our noses. I don’t believe that, we as fans, have any recourse, do we? If in fact the team that we’ve fielded over the past few seasons has been done in violation of the Debt Service Rule Section 1 I think the ownership group has a lot to answer for. I hope this doesn’t get swept under the carpet.

    The Dipsy

     
  • Posts: 52 R.C. Cowie

    Avatar of R.C. Cowie

    Dipsy,

    Your point is valid and it is what I fear as well. It’s highly unlikely that the 2011 season was the first time they’ve exceeded their debt limit.

    -RC

     
  • Posts: 271 Jeff of Nova

    Avatar of Jeff of Nova

    I am not jumping to conclusions yet, if you read the article on ESPN, they also state that many teams report their earnings such as attendance and jersey sales differently and it may be for some teams, that they need to open their books and explain how they are reporting everything.

    Just a thought before we start accusing and thinking the Phillies are being dishonest and have fielded teams the last so many year in violation of league policy.

    Let it play out. This is a report in one Newspaper.

    “”Rob Manfred, MLB executive vice president of labor relations, would not confirm the number or identity of teams to the Times.

    “To take a snapshot of the number of non-compliant clubs at a point in time can be very misleading,” he told the newspaper. “With one or two exceptions, we see how teams are going to be compliant again in the short term, so we’re not worried about them.”"

     
  • Posts: 0 Bob in Bucks

    As a finance person I can’t but help to point out that you have mixed a lot of apples and oranges here. I see the accusation in ESPN but your numbers don’t even relate to the rule.

    Firstly, the rule has absolutely nothing to do with the value of the club so your Forbes valuation is meaningless. You have put in Phils “operating cost” when the number is supposed to be EBITDA (earnings). I have no idea where you have obtained these numbers because so far as I know they have never been made public.

    Then you multiple by 10 which is supposed to be the DEBT limit but you refer to it as spending. In other words, I would say your numbers are totally fictional.

    Nevertheless, assuming the ESPN article is valid, I am not really surprised. The Phillies have a new ballpark which means they took a loan to pay for their share of the expense and they have greatly increased payroll over the last few years. I am sure they have been running losses for a few years and were forced to borrow in order to make payroll and put up a new screen at the ballpark, etc. Simply put they spend more than they take in and cover it with bank loans.

    I suspect they are truly tapped out and you can expect some reductions in payroll over the next few years. I am not particularly concerned with the MLB rule as 10X is just a number which could easily have been 12X. The Lee deal was definitely a stretch and will hamper Amaro’s options for the next few years.

     
  • Posts: 0 Andrew From Waldorf

    Did I goto sleep and wake up in Metsville?

     
  • Posts: 0 The Face

    It could be worse. We could have the Wilpon’s as owners. They owe us a damn good explanation and a damn good solution. The sell out streak is over 160. I don’t want to hear about the team being in debt when they’re getting 46,000 people in that park EVERY game. Not to mention merchandise, and concessions…Debt my balls! FIX IT, FIX IT, FIX IT, FIX IT!!!

     
  • Posts: 0 Jack

    Something about this doesn’t add up to being close to accurate. The team gets almost 240 mil from stadium revenues, local tv and radio and they are about to get a new contract on that at the end of this season. If your numbers on the national tv are right they get over 275 a year between the stadium and national tv. They are in quite good shape in reality.

     
  • Posts: 0 Ryan H.

    I’m no accountant and numbers make my head just spin. but the one thing I noticed on the LAtimes report about this was that out of the ten teams who are included in this list of being over their debt limit, the phillies are the only successful team. the rest of the teams either are small market empty stadium teams or complete messes like the mets and dodgers. thats the thing that scares me.

     
  • Posts: 0 Rockman

    There is a severe problem with your math. You stated above “Let’s average the Phillies operating costs from 2010 and 2009 and multiply by 10. We would get the Phillies debt ceiling for this year.” Then you proceeded to add 2009 and 2010 together but never average them. Average Operating Cost for 2009 and 2010 would be $15.4 Million not $30.8 Million. Here’s the correct math:
    $14.5 (mil) (2010) + $16.3 (mil) (2009) / 2 = 15.4 million

    It then makes your Operating Cost $154 million instead of $304 million. It means $154 million (Operating Cost) – $151.4 million (Debt) = $3.6 million. The number is a bit smaller than the $156 Million touted in the title of the article.

     
    • Posts: 2 phildirt

      Avatar of phildirt

      Rockman got you on the math R.C.

      Everybody calm down. We are not going the way of the Mets & Dodgers. Believe it or not, this is the hidden advantage to having a shadow ownership group vs. a sole owner. With a sole owner, if that one bonehead marries the wrong woman (in a community property state like Cali) or gets caught up in a Madoff web of investments; he can take the whole ship down with him. In the case of the Phillies, with a ownership group of roughly a dozen parties it is highly unlikely that they will all screw up simultaneously. So, relax in the knowledge that the Phillies Ownership Cabal has got your back.

       
      • Posts: 0 Rockman

        You hit the nail on the head. The Dodgers and Mets were each controlled by one man. The Phillies have myriad owners, Bill Giles and David Montgomery all controlling how the money is spent.

         
 
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